Knowing where to start in the world of investing is a daunting process. There is too much confusing jargon and the wealth of information out there can be a help but also a hindrance.
While carrying out plenty of research is a good thing, the amount and variety of information available in the digital age means that there is conflicting information aplenty.
However, if I was starting out with a lump sum or regular income which I wanted to invest, one of the first things I’d do with my cash is put it in an index tracker fund.
Such a fund works by tracking the movements of a popular stock market index, such as the FTSE 100 or FTSE 250 in the UK. That way, rather than buying shares in individual companies, the investment will perform relevant to all the companies within that index.
Here’s why I think that’s a good idea for first time investors.
Most people who at least vaguely keep an eye on the news will have heard of the FTSE 100. The performance of the UK’s top 100 publicly traded companies is an indicator of the current economic situation globally as they have major international exposure, and many of the companies are household names.
The majority of investment platforms will offer a number of index tracker funds that are easily found and identified, as well as being easy to follow and understand for beginners.
Perhaps the biggest benefit of investing in index tracker funds is that typically they will contain a large cross-section of sectors and industries, meaning that there is less risk involved in the investment as certain sectors will be less cyclical, or less subject to volatility than others.
As investing in tracker funds is generally seen as less of a risk compared to investing in individual stocks due to the aforementioned diversification, I’d start off my portfolio with one in order to get a feel for how investing works.
While any investment in the stock market can go up or down, buying tracker funds leaves an investor less prone to volatility until they become more experienced in equity markets.
Generally speaking, fees for purchasing and maintaining index tracker funds are low, especially in comparison to managed funds, where an investment fund manager will make decisions on a portfolio on your behalf.
There are a number of low-cost tracker funds available via investment platforms such as Hargreaves Lansdown or AJ Bell.
Legendary US investor Warren Buffett has been bullish on index tracker funds for years, asserting that they are a smart, passive investments that consistently outperform many alternatives for a lower cost.
Buffett said that as investments, these passive funds “make the most sense practically all of the time”.
While each individual will have their own appetite for risk and preferences on where to invest their money, I’d say following the advice of someone with as much pedigree as him would not be the worst thing to do.
Of course tracker funds may not be the ideal investment for everyone, there are certainly more potentially lucrative returns on offer than what the FTSE 100 or FTSE 250 might typically provide. However, as a first investment, I’d certainly see it as a smart move with my money.
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Conor Coyle has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.