I understand the appeal of investing in buy-to-let property. I get it – it’s stable and consistent income.
But if you want to make a million, then sticking to buy-to-let investing could be harming your chances. Stock markets have typically generated higher returns than property over time. Someone who is focused only on buy to let is missing out on a proven wealth builder in the stock market. One big criticism from property investors is that the stock market is risky, and that people will always need property. That’s true – though house prices can fall too!
But what if you could get exposure to the stock market’s returns, without taking on too much risk? If you buy five companies, then that’s a very concentrated portfolio. However, diversification is investing’s one free lunch – through owning many shares we protect ourselves from the effects of a bad stock that implodes.
For this reason, I believe stock market index trackers are a great way for many private investors to invest in the stock market.
A FTSE 100 tracker
A FTSE 100 index tracker is an exchange-traded fund (ETF) that buys shares in every FTSE 100 company. That means anyone who buys this ETF owns great companies such as Royal Dutch Shell, Vodafone, and HSBC. It’s instant diversification, and FTSE 100 companies are typically stable and have consistent cash-flows – and consistent dividends.
When investing, people should be looking at returns in the long term. If they need that cash within a year or two, then putting that cash into an index tracker is a gamble on the market. Who knows what can happen in two years? But the longer our investment horizon becomes, the more likely it is that we’ll make money. As Benjamin Graham (the father of value investing) said, “In the short run, the market is a voting machine – but in the long run the market is a weighing machine“.
An index tracker is relatively simple to set up, and we can even set up direct debit payments every month to automate the process. This means that we’ll be able to take advantage of any weakness in the stock market as we’ll buy more units of the same ETF when the price is low.
As well as a solid tracker fund, I think it makes sense to pick individual stocks, so long as one is comfortable with those risks. Risk can be mitigated by knowing what you’re doing. Picking stocks that have wide moats, with self-sustaining cash inflows, as well as profits and healthy dividends, are proven methods to help avoid losing money.
We only need to pick one winning stock to make a lifetime of investing worthwhile, and companies like Rightmove and Dart Group (owner of Jet2) have delivered large returns for shareholders. Are these companies so hidden out of sight that we couldn’t follow the leads ourselves?
Sometimes a stock market winner is hiding right in front of us. But if all of your cash is set aside in buy to let, then you could be missing out on that upside.
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Michael Taylor does not own shares in Rightmove or Dart Group. The Motley Fool UK has recommended Rightmove. 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.