Regularly investing £500, or any other amount, in a FTSE 100 index tracker fund could be a worthwhile move in my opinion. It provides a simple, low-cost means for any investor to access the high-single-digit annual returns offered by the FTSE 100.
Since the index currently trades on a relatively favourable valuation, now could be the right time to start investing in large-cap shares for the long term.
For many people, investing in the stock market seems to be a hugely challenging prospect. There are a large number of companies, a huge range of variables that can affect its performance, and a variety of technical terms that can be difficult to understand.
A FTSE 100 index tracker fund is, therefore, a relatively simple means of gaining exposure to the return potential of the UK’s biggest companies. It does not require an investor to consider whether a specific stock offers good value for money, nor how many companies they should have in their portfolio.
Instead, it offers exposure to 100 global businesses that could mean higher returns than other mainstream assets such as cash, bonds and property.
As well as being simple, a FTSE 100 index tracker fund is also a low-cost means of accessing the stock market’s growth potential.
This is especially relevant for investors who have a modest amount of initial capital. They may find that while dealing costs for individual shares have fallen in recent years, the cost of building a portfolio of 20-30 individual stocks reduces their overall return potential.
As such, a FTSE 100 index tracker fund could be a cheaper alternative that is often available at an annual cost of under 0.25% of the amount invested.
The FTSE 100’s return potential seems to be relatively high at the present time. Evidence of this can be seen via its dividend yield, which currently stands at around 4.4%. This suggests that it may be undervalued right now, with risks such as coronavirus and Brexit seemingly weighing on investor sentiment.
History shows that the most opportune times to buy shares have been while they offer wide margins of safety. As such, with many of the index’s members currently having low valuations, investing regularly in the FTSE 100 could be a shrewd long-term move.
Of course, as your portfolio grows it could be worth buying individual stocks to complement your index tracker fund. They may provide the chance to outperform the index and generate higher returns in the long run, which could impact positively on your financial future.
With the FTSE 100 currently having 25 stocks with yields over 5%, as well as many others which offer low ratings compared to their historic averages, being selective about the stocks you purchase could improve your long-term returns and boost your financial prospects.
Peter Stephens has no position in any of the shares 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.