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Have £1,000 to invest? I’d buy a FTSE 100 index tracker never sell it

Buying a FTSE 100 index tracker fund is a simple process that could deliver high returns in the long run. The index’s track record shows it has the potential to produce high annual returns, while its current valuation suggests it offers a wide margin of safety.

For investors with £1,000, and for whom diversifying may not initially be possible, obtaining a favourable risk/reward ratio from a FTSE 100 index tracker could be a worthwhile move. It may improve your financial position – especially if you enable compounding to positively impact on your returns in the long run.

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Track record

The FTSE 100 may be viewed by some investors as an index which provides modest capital returns and a relatively impressive income return. This may be because it trades less than 10% higher than it did over 20 years ago. However, the long-term track record of the index suggests it could produce impressive capital growth, as well as a high income return.

Since its inception in 1984, the FTSE 100 has produced an annualised total return of around 9%. Certainly, much of that growth was delivered prior to the turn of the century. But, with it currently offering a dividend yield of around 4.4%, it may now be undervalued after recording modest gains in the past two decades.

As such, its future prospects seem to be relatively bright, and it could post impressive capital returns which boost your financial future.

Risk/reward

As well as offering high total return potential, a FTSE 100 index tracker fund provides a high degree of diversification for investors. For example, investing £1k in a wide range of individual stocks to reduce company-specific risk may not be a realistic goal. The cost of commission could mean your overall returns are somewhat disappointing on a net basis.

However, buying units in a tracker fund is likely to be cheap and yet provide exposure to 100 of the biggest companies in the world. Many of them operate outside of the UK, which provides geographic diversification, while a range of sectors and industries are represented in the FTSE 100. Therefore, from a risk/reward standpoint, the index offers a highly attractive proposition – especially for investors with a modest amount of capital.

Compounding

While it may be tempting to sell your FTSE 100 tracker fund if it’s in profit, holding it for the long term could deliver significant returns. A 9% annual return may not sound especially impressive. But, when it’s repeated over a period of 30 years, for example, it equates to a total return of over 1,200%.

As such, buying and holding a FTSE 100 index tracker fund over the long term could be a sound move that benefits your financial situation. Of course, as your capital builds you may wish to buy individual stocks that have the potential to beat the index. In doing so, you could outperform the index, and further increase your portfolio growth rate in the long run.

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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.