A passive tracker fund is, in my opinion, one of the best ideas for investors who are just starting out.
The great thing about passive tracker funds is that they do not require any babysitting, and it is relatively easy to find one that works for you.
There are thousands of actively managed funds on the market right now, and picking the right one can be a challenge. By comparison, there are only a handful of developed market stock indexes that are worth tracking, such as the FTSE 100, FTSE 250 and FTSE All-Share.
And when you’ve decided which index to go for, because tracker funds are only designed to replicate the underlying index they are tracking, choosing a fund that works for you is relatively straightforward. The only variable is cost.
The question is, which index should you pick for your portfolio?
While the FTSE 100 is the UK’s leading blue-chip index, I think that investors with a long-term focus could be better off buying the FTSE 250. While oil stocks, banks and pharmaceuticals dominate the FTSE 100, the FTSE 250 will give you a broader opportunity with a domestic focus in sectors such as retail and housebuilding. The FTSE 250 also has a more comprehensive mix of growth and income stocks.
The more significant allocation towards smaller and mid-cap stocks has helped the FTSE 250 outperform its larger peer substantially over the past decade.
Over the past 10 years, the FTSE 100 has produced an average annual return for investors of just under 7%. That is including the reinvestment of dividends and is much better than the returns from a Cash ISA.
But over the same time frame, the FTSE 250 has produced an average annualised return for investors of 11.3% including dividends. At this rate of return, I calculate that every £1,000 invested in the FTSE 250 10 years ago, would be worth £3,080 today.
The great thing about compound interest is that the longer you leave your money to grow, the faster it will accumulate.
Ten years might seem like a long time, but the FTSE 250 has been around for much longer. It was first launched in October 1992, which means investors have been able to follow this mid-market index for the past 27 years.
Investors who were smart enough to buy the index at its inception would be sitting on handsome gains today. Using data from the index’s manager, FTSE Russell, I calculate it has produced an average annual return for investors in the region of 11.4% per annum since the end of 1992.
This implies that every £1,000 invested at the time of the index’s birth would be worth around £18,500 today.
The bottom line
So that’s how much money an investor would have if they’d put £1k in the FTSE 250 at the time of its launch.
Considering the fact that the index has returned more than 11% per annum for nearly three decades, I think it is highly likely that these sort of returns will continue going forward.
And with this being the case, I reckon that if you have just £1k to invest today, and want to get the most bang for your buck, the FTSE 250 is the way to go.
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Rupert Hargreaves owns no share 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.