You’d have to be living under a rock to be oblivious to the mayhem in financial markets at the moment. Global stocks have plummeted as a result of the outbreak of Covid-19. So far, the FTSE 100 index has shed around 27% of its value.
It may seem like the wrong time to be new to the world of investing. But rest assured, I think now could be one of the best times to invest for the next 5 to 10 years!
If you’re about to take the plunge and make your first investment, you couldn’t have picked a better time.
This is because many stocks within the UK’s premiership stock market index are trading on cheap valuations. For savvy investors, it’s the perfect time to grab a bargain.
However, with an overwhelming selection of stocks, funds, and ETFs out there, you may be wondering where to start.
The debate over whether tracker funds are better investments than individual stocks is heated. Let’s take a brief look at both sides:
Index tracker funds have surged in popularity over recent years. They’re loved for their simplicity and accuracy.
When you invest in an index fund (e.g., a FTSE 100 tracker fund), you essentially buy the entire index. This provides instant diversification across a range of sectors and industries.
Owning a portfolio of individual stocks is often seen as the conventional approach to investing. It allows for greater freedom of choice over investments, adding a bit more excitement.
It’s perfectly possible to be as diversified when owning individual shares as you would be owning a tracker fund, but it requires more money, as well as more time and effort.
Personally, I’d always recommend experienced investors to construct a portfolio of 10 to 20 good quality, diversified individual stocks. That way, you can have a good shot at outperforming the index and receiving greater returns.
However, for inexperienced investors or those with little time on their hands, a FTSE 100 tracker fund is a solid choice. What’s more, it’s not necessarily an inferior strategy to investing in individual stocks.
Regardless of where you invest that first £1,000, it’s important to hold investments for the long term. Bumper returns rarely come overnight.
The FTSE 100 is renowned for its juicy dividend yield, averaging just under 5%. This means that for a £1,000 investment, you’d receive £50 in dividends each year. Re-investing those dividends back into the tracker fund speeds up the compounding process.
On top of this, investing over the long term allows you to ride out the highs and lows of the market without taking a huge hit to your portfolio. Short-term losses shouldn’t affect you if you’re in it for the long term.
The FTSE 100 is on offer
The FTSE 100 hasn’t been valued this low since 2012. There are vast amounts of quality stocks trading on dirt-cheap valuations at the moment. Think Aviva, Unilever, Lloyds, and Tesco just to name a few.
A tracker fund eliminates the need to accumulate broker fees, make tough decisions, and saves time over choosing individual stocks.
Ultimately, the FTSE 100 is usually an indicator of the health of the UK economy. So, if like me you’re bullish about long-term economic growth, a FTSE 100 tracker fund should be a strong buy.
So don’t waste the stock market crash. Invest that first £1,000 for the long term and look forward to attractive returns in the future.
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Lloyds Banking Group and Tesco. 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.