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For those just starting out in the world of investing, I believe holding funds in a SIPP or ISA is a good place to begin as you won’t likely be charged an account fee for holding only funds. Funds that measure their performance against a benchmark typically charge lower fees. You will be familiar with benchmarks, and they make performance appraisal simpler.

The FTSE 100 Index would be a suitable benchmark for measuring the performance of large UK companies. To track it closely yourself would involve buying the right amounts of 100 shares; the amounts will vary over time. Unless you have a very substantial amount to invest, the trading costs involved will be prohibitive.

Investing solely in the FTSE 100 requires confidence that large UK companies as a group will do better than anything else out there. Until you are comfortable picking winners, I would suggest investing much more broadly, and not just in what comes easily to mind.

Global benchmarks

If you add together what every investor in the world owns, you will find the global multi-asset market portfolio. Luckily the work has been done for us. Ignoring various subdivisions and asset classes that are difficult to invest in, having 55% of your money tracking the MSCI All Country World Portfolio (ACWI), a global equity benchmark, and 45% tracking the Bloomberg Barclays Global Aggregate Total Return Index (GATRI), a benchmark for global bonds, would give you exposure to the global market.

These diversified benchmarks include thousands of individual stocks and bonds, from multiple countries, which will be doing well or not, at different points in time. However, if trying to match the FTSE 100 on your own is tough, matching these is near impossible. This is why funds are useful because they have the resources to do it for you, for a fee of course, but it will be cheaper than trying yourself.

As a suggestion, Invesco provides multiple global bond funds whose performance can be measured against the GATRI, and iShares by BlackRock offers an exchange-traded fund that tracks the global equity benchmark. There are others out there but I would look for ongoing fees of less than 1% per year, and ideally low to zero initial fees, on funds available through a SIPP or ISA provider.

Funding issues

The global market portfolio provides the greatest possible diversification. For a new investor, it is a prudent starting point. However, because funds that track global equity and bond benchmarks have a tough mandate, they may charge higher fees than those tracking benchmarks with far fewer components.

As investment experience is gained, an individual may choose to divide the benchmarks up and find appropriate tracking funds for the divisions. Global bonds could be broken down into government and non-government bonds, and global equities divided into developed and emerging markets, with further divisions being possible. Individual stocks, bonds or more exotic investments may be of interest in the future, but keeping the global market as a reference point is something to be encouraged.

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James J. McCombie has no position in any funds mentioned or outright positions in any index mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.