They say the first step is always the hardest. Or is it? Today, I’m going to explain how anyone can build a passive income stream by setting aside just £1 a day. 

What? Just £1?!

The idea of just investing £1 a day sounds a bit ludicrous, so let me explain. The actual amount put aside every day doesn’t really matter, at least initially. It could be £2, or £5, or £10, or whatever. Obviously, £10 a day is better than £1, but that may not be doable for a lot of people.

The point is simply to make the process as free of friction as possible by keeping the amount saved small enough to not seem daunting. This increases the likelihood of it becoming a habit. And developing a good savings habit is fundamental to building wealth over the long term.

Now, investing £1 a day isn’t practical. Every three months (£91), every six months (£183) or every year (£365) makes more sense. Regardless of how regularly I buy, I’d be sure to pick a stockbroker that charges low/zero commission when I use their regular investing service. This simply invests my money automatically on a set day rather than a day of my choosing. 

Next steps

The question that now presents itself is what to buy with this money. For passive income, I’d target dividend-paying stocks. These are companies that choose to distribute a proportion of profits to investors on a quarterly, or bi-annual, basis. Positively, there’s no shortage of such businesses on the London market. 

The only issue with the above approach is that dividends are never guaranteed. So throwing all my accumulated cash into just one stock is risky.

Clearly, one solution to this would be to spread my money around a number of companies. Since we’re only starting to invest using a small amount of money, I’d probably buy a cheap exchange-traded fund that tracks an index such as the FTSE 100. Here, I’d get access to a big group of stocks in one click! Buying individual stocks is something to do further down the line.

Out of interest, the FTSE 100 yields 3.5% right now. That’s an awful lot more than the 0.67% I’d get from a Cash ISA. In fact, holding that £365 saved every year as cash is just about the worst thing I can do.

Due to the paltry amount of interest I’d be getting, it would actually lose value over time, due to inflation. Instead, I’d save my £365 into a Stocks and Shares ISA. Doing so also ensures I’ll pay no tax on the passive income I receive.

Have a little patience

I think the hardest part of growing a passive income stream is being patient. After all, investing that £365 in a FTSE 100 tracker wouldn’t generate much in the way of dividends from the off.

There are ways of turbocharging this amount, such as increasing the amount of cash per day I save once the habit has formed. I could go from £1 per day in Year One, to £2 in Year Two, to £3 in Year Three, and so on. 

Since there’s no rule to say an investor must spend the money received, I’d make a point of always reinvesting it into buying more shares to benefit from compounding. By the time I really want to use that income, I should have a far larger amount to draw on.

The post How I’d build passive income from £1 a day appeared first on The Motley Fool UK.

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Paul Summers 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.

Having said that, I won’t be investing in a FTSE 100 tracker fund in 2021. Below, I’ll explain why. I’ll also look at where I will be investing. 

FTSE 100 tracker funds: the investment case

One issue that concerns me in relation to the FTSE 100 index is that, while it contains plenty of world-class companies, it also contains many companies that are facing structural challenges at present.

The oil majors, Shell and BP, are an example. They are facing challenges due to the shift towards renewable energy. Meanwhile, the banks, such as Lloyds, HSBC, and Barclays, are all under threat from digital banks and financial technology (FinTech) businesses such as Monzo and Revolut.

With so many companies facing structural challenges, I don’t think it makes sense to own the whole index through a tracker fund.

Stocks Warren Buffett would avoid

Another concern I have over the FTSE 100 is that contains exposure to quite a few ‘low-quality’ stocks.

Low-quality stocks are those whose underlying businesses aren’t very profitable, have weak balance sheets, and have little in the way of a competitive advantage. These are the kinds of companies that most top investors such as Warren Buffett avoid because they’re generally not good long-term investments.

Like Buffett, I have no interest in owning these kinds of stocks.

FTSE 100 trackers have low technology exposure 

Finally, the FTSE 100 doesn’t have much exposure to the technology sector. The index does have some niche tech plays such as Experian, Rightmove and Ocado. However, it lacks technology powerhouses such as Apple and Amazon that are having a profound impact on our lives today.

Given that we’re in the middle of a technology revolution, I want plenty of exposure to tech in my portfolio and a FTSE 100 tracker fund is not going to provide that.

How I’ll be investing in 2021

Looking at what a FTSE 100 tracker fund provides exposure to, I think there are better ways to invest. Here’s how I’m going to invest in 2021.

First, I’m going to pick out what I consider to be the best stocks in the FTSE 100 and invest in these directly. Unilever and Diageo are two good examples. These companies have delivered amazing returns for investors in the long run. And with both poised to benefit from rising wealth in emerging markets, I see no reason why they won’t outperform the index going forward.

Next, I’m going to look outside the FTSE 100 in the mid-cap and small-cap areas of the UK market for high-quality stocks. Gamma Communications and dotDigital are some good examples of stocks I’ve been buying in these areas of the market. These stocks have been amazing investments for long-term holders. Gamma, for example, has delivered nearly 10 times the return of the FTSE 100 over the last five years. I think it has the potential to keep outperforming.

Finally, I’ll add exposure to world-class stocks that are listed internationally like Apple, Microsoft and Amazon – all of which have strong long-term growth potential, in my view.

This approach has generated much higher returns than a FTSE 100 tracker fund for me in the last few years. I see no reason why it will be any different in 2021. 

The post FTSE 100 tracker funds: why I won’t be buying one in 2021 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever, Diageo, dotDigital, Gamma Communications, Experian, Rightmove, Amazon, Apple, Microsoft, Lloyds Bank and Royal Dutch Shell. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Apple, and Microsoft. The Motley Fool UK has recommended Barclays, dotDigital Group, Experian, HSBC Holdings, Lloyds Banking Group, and Rightmove and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.

Footsie trackers definitely have their advantages. However, I think there are better ways for me to invest. Here I’ll highlight why and I’ll also explain how I invest in shares.

FTSE 100 tracker funds: 3 things to know

FTSE 100 tracker funds are good for instant diversification and for those who don’t want to think too much about their investments. But one major disadvantage is that they only contain exposure to UK-listed companies.

The UK stock market has many world-class businesses. Unilever and Diageo are good examples. A FTSE 100 tracker has exposure to both of these. However, a lot of other top companies are listed internationally. Amazon and Nike, for example, are listed in the US. This means they’re not part of a Footsie tracker.

With so many top companies listed overseas, I think it’s smart to take a global approach to investing.

Minimal technology exposure

Another weakness of FTSE 100 tracker funds is that they don’t have much exposure to the technology sector.

There are a few technology players in the FTSE 100. Companies such as Experian, Rightmove, and Sage are some examples. But the Footsie does haven’t any tech powerhouses such as Apple, Alphabet (Google), and Microsoft. Again, these are all listed in the US.

Given that we’re in the midst of a digital revolution right now, I think it’s a good idea to have a significant amount of exposure to the technology sector.

Large companies only

A third issue with tracker funds is that they only contain exposure to large companies.

The problem here is that many of these large companies are not growing much. FTSE 100 companies such as Shell, BT, and Vodafone are all struggling for growth. This is reflected in the performance of FTSE 100 index funds. Over the last three years, they have delivered negative returns.

The UK has plenty of exciting, high-growth companies. But most are quite small. This means they’re not part of a FTSE 100 tracker. 

How I’m investing today

Instead of a FTSE 100 tracker fund, I think it’s a better idea for me as an active investor to put together a customised portfolio of individual stocks. This is how I invest my own money. This approach is more work than buying an index fund, sure. However, the financial rewards are potentially much greater.

My portfolio consists of three main types of stocks:

• Large-cap growth stocks such as Apple, Microsoft, and Alphabet. I believe these stocks are poised for strong long-term growth in today’s digital world. Apple, for example, which is Warren Buffett’s top stock, has plans to dominate healthcare.

• FTSE 100 dividend stocks such as Unilever, Diageo, and Reckitt Benckiser. These kinds of stocks aren’t as exciting as my growth stocks. However, they are reliable performers, which means they provide portfolio stability. They also provide passive income, which is nice.

• Small-cap growth stocks for more explosive growth. Some of my holdings here include video game specialist Keywords Studios (up 50% in a year), logistics company Clipper Logistics (up 70% in a year) and US-listed freelance platform operator Upwork (up 200% in a year). 

I believe that this approach is likely to generate much higher returns for me than a FTSE 100 tracker over the long run.

The post FTSE 100 tracker funds? I think this is a smarter way to invest appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Apple, Alphabet, Microsoft, Royal Dutch Shell, Reckitt Benckiser, Unilever, Diageo, Rightmove, Sage, Clipper Logistics, Amazon, Keywords Studios, and Upwork. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Amazon, Apple, Microsoft, and Nike. The Motley Fool UK has recommended Clipper Logistics, Diageo, Experian, Keywords Studios, Rightmove, Sage Group, and Unilever and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. 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.

However, my view is that a mix of top actively-managed funds and high-quality stocks could potentially deliver higher returns than a FTSE 100 tracker in the long run. Here’s a look at three top global equity funds that have outperformed the FTSE 100 by a wide margin recently.

Outperforming a FTSE 100 tracker

One fund that I view as a good investment is Fundsmith Equity. This is a large global equity fund that is managed by portfolio manager Terry Smith.

Since its launch in late 2010, Fundsmith has delivered outstanding returns for investors. For example, for the five-year period ending 31 December 2019, Fundsmith delivered a return of around 132% versus 41% for the FTSE 100. More recently, the fund has held up very well in the stock market crash, returning -8% in the first quarter of 2020, versus -24% for the FTSE 100.

One reason this fund has delivered such great returns for investors is that Smith has very strict investment criteria when it comes to picking stocks. Instead of investing in a wide range of companies, he only invests in a handful of high-quality, resilient businesses that have advantages that are difficult to replicate.

Fundsmith is significantly more expensive than your average FTSE 100 tracker. Fees through Hargreaves Lansdown are 0.95% per year plus platform fees. But I believe this is well worth it, given the fund’s track record.

A focus on ‘exceptional’ companies 

Another actively-managed fund I hold in high regard is Lindsell Train Global Equity.

Like Fundsmith, Lindsell Train Global Equity has delivered stunning returns for investors in recent years. For the five-year period to the end of 2019, the fund returned a very impressive 147%. And for the first quarter of 2020, it returned -11%, outperforming FTSE 100 tracker funds by a long way.

This is another fund that focuses on high-quality businesses. Specifically, portfolio managers Nick Train and Michael Lindsell look for ‘exceptional’ companies that demonstrate long-term durability in cash and profit generation. Looking at the fund’s long-term performance track record, this approach seems to deliver.

This fund is available on the Hargreaves Lansdown platform with a low fee of 0.5% plus platform fees. At that price, I believe it’s a great core investment.

Superb performance 

Finally, a third fund I’d buy over a FTSE 100 tracker is Blue Whale Growth.

This is a relatively new global equity fund that was only launched in September 2017. I wouldn’t let the lack of a long-term track record put you off though. Since its inception, its performance has been fantastic. Last year, Blue Whale Growth returned 28%, and the year before it returned 9%. By contrast, the FTSE 100 returned 17% and -9%.

Like the two funds above, Blue Whale is a concentrated fund that focuses on high-quality companies. Specifically, portfolio manager Stephen Yiu looks for companies that have the ability to grow over the long term, and that are attractively valued. Judging by the performance of the fund, Yiu is a good stock picker.

Overall, there’s a lot I like about this under-the-radar global equity fund. Fees are 0.89% per year plus platform fees through Hargreaves Lansdown.

The post FTSE 100 trackers have advantages. But I’d rather invest in these top global equity funds appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Hargreaves Lansdownm Unilever, Diageo and Sage and has positions in Fundsmith Equity, Lindsell Train Global Equity, and Blue Whale Growth. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo, Hargreaves Lansdown, and Sage Group. 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.

But have FTSE 100 trackers actually been good investments? Let’s take a look at how much £5,000 invested in one five years ago would be worth today.

FTSE 100 tracker returns

Two of the most popular FTSE 100 tracker funds are the HSBC FTSE 100 Index and the Legal & General UK 100 Index Trust. You can find both on the Hargreaves Lansdown platform.

Looking at the performance of the accumulation version of the HSBC fund (which reinvests dividends), it’s returned a total of -1.7% over the last five years. Meanwhile, the accumulation version of the Legal & General fund has returned a total of -0.5%. Averaging this out, you’re looking at a total return of -1.1% over the last five years.

What this means is that had you invested £5k in a FTSE 100 tracker five years ago, your investment would now be worth around £4,945. And that’s before Hargreaves Lansdown’s platform fee of 0.45% per year.

I think it’s fair to say this kind of return is quite disappointing.

Could you do better?

I realise the Footsie has been hit hard recently due to the coronavirus outbreak. So you could argue it’s not a great time to analyse the five-year performance of FTSE 100 tracker funds right now. However, I think it’s worth pointing out many other investments have performed far better over the last five years.

For example, the Legal & General International Index Trust – which tracks the FTSE World (excluding UK) Index – has returned about 45% over the last five years. That’s turned £5k into about £7.3k, excluding platform fees. And the Legal & General Global Technology Index – which tracks the global technology sector – has returned about 139%, turning £5k into nearly £12k, excluding fees.

Similarly, in the actively-managed funds space, the highly-popular Fundsmith Equity has delivered a total return of about 106% over the last five years. This means a £5k investment would now be worth more than £10k. And Lindsell Train Global Equity, another popular actively-managed fund, has returned roughly 90%, turning the same amount into around £9.5k.

Meanwhile, many individual UK stocks that aren’t in the FTSE 100 have also generated brilliant returns for investors over the last five years. For example, online fashion retailer Boohoo has risen approximately 820% over the last half-decade, turning £5k into roughly £46k. And video game specialist Keywords Studios has risen about 830%, turning £5k into about £47k.

It pays to diversify

Ultimately, the key takeaway here is it can pay to diversify your investments. Instead of just owning a FTSE 100 tracker, it could be a good idea to build a more diverse portfolio. Look for exposure to both international stocks and high-quality UK companies outside the FTSE 100 as well as inside it. This approach could give you a better overall chance of generating strong long-term returns from the stock market.

If you’re interested in learning more about how to beat the FTSE 100, you’ll find plenty of information right here at The Motley Fool.

The post FTSE 100 tracker funds: here’s how much £5k invested 5 years ago would be worth today appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Boohoo, Keywords Studios, and Hargreaves Lansdown and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. The Motley Fool UK has recommended boohoo group, Hargreaves Lansdown, and Keywords Studios. 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.

But now we’re in a bear market and stocks are falling. That means some of the flaws of passively-managed tracker funds are being exposed. Here, I’ll look at some of the drawbacks of owning FTSE 100 tracker funds. I’ll also explain why I believe investors are better off picking individual stocks in the current environment.

No control over your holdings

The main disadvantage of tracker funds is you have no control over your holdings. You simply own the whole index. In the current environment, where there’s an enormous amount of economic uncertainty, this could be a potential setback.

For a start, if you own every stock in the FTSE 100, you’re going to have exposure to a number of companies that could be impacted significantly by Covid-19. I’m talking about companies such as International Consolidated Airlines, easyJet, Carnival, and Compass Group. These could take a while to recover from the disruption, meaning their share prices could be depressed for a while.

Additionally, if you own the whole index, you’ll also have exposure to a number of companies that could be vulnerable in an economic downturn. BT Group and Centrica are among those that come to mind here. Both have alarming amounts of debt on their books, which adds risk. I wouldn’t want to own these in a recession.

Ultimately, if you buy a FTSE 100 tracker fund, you’re at the mercy of the market. To quote Martin Gilbert, chairman of Aberdeen Standard Investments: “Passive strategies leave investors fully exposed to the teeth of the bear.”

A more selective approach could pay off 

In my view, it could pay to be more selective about your investments. That means buying individual stocks. This approach has several advantages.

Firstly, you can focus on high-quality companies likely to be less vulnerable in a recession. Unilever and Reckitt Benckiser are good examples (both have recently outperformed the FTSE 100 significantly) as they’re seen as consistent performers. 

Secondly, you can focus on companies likely to be impacted less by the coronavirus. Accounting solutions provider Sage is a good example. It should be relatively well insulated from the disruption.

Finally, you can focus on stocks that look oversold and have the potential to rebound significantly. Names that come to mind include Legal & General Group and JD Sports Fashion.

This is certainly the approach I’m taking right now. Instead of just buying the whole index, I’m focusing on high-quality companies I think have the potential to outperform the market.

I believe that in the current environment, this approach should provide higher returns than a FTSE 100 tracker.

The post Why I’d buy high-quality stocks over a FTSE 100 tracker in this bear market appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever, Reckitt Benckiser, Sage, Legal & General and JD Sports Fashion. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Carnival, Compass Group, and Sage Group. 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.

But have FTSE 100 tracker funds actually been good investments in recent years? To answer this question, let’s look at how much £1,000 invested in a FTSE 100 tracker fund five years ago would be worth today.

Underwhelming returns

Looking at the performance of the HSBC FTSE 100 Index (accumulation), this tracker fund has returned 30.3% over the last five years, according to Hargreaves Lansdown. Meanwhile, the Legal & General UK 100 Index Trust (accumulation) has returned 31.9% over five years, according to Hargreaves.

Taking the average return of these two index funds, you’re looking at a return of approximately 31% over five years. That means that had you invested £1,000 in a FTSE 100 tracker five years ago, your investment would have grown to around £1,310 today minus trading commissions and provider fees. That equates to an annualised gain of 5.55%.

Now, that’s a reasonable return. It’s certainly higher than the return you would have received if your money was parked in a cash savings account earning interest. But let’s be honest. It’s not a great return, is it? Compared to other investments, it’s a little underwhelming.

For example, had you invested £1,000 in an S&P 500 (the main US stock market index) tracker fund five years ago, that money would now be worth around £1,920, ignoring fees. Had you invested £1,000 in the actively-managed global equity fund Fundsmith five years ago, that capital would now be worth around £2,285, not counting fees. Or, had you put £1,000 into Boohoo shares five years ago, that money would now be worth around £6,666, ignoring fees. Looking at these kinds of returns, the FTSE 100’s five-year return is quite disappointing.

The problem with the FTSE 100

Why has the FTSE 100 generated such mediocre returns? It all comes down to the composition of the index. You see, the Footsie is filled with stocks in low-growth industries such as oil & gas, banking, and tobacco. These kinds of stocks aren’t growing much. For example, Royal Dutch Shell and HSBC haven’t lifted their dividends in years. It also has minimal exposure to the fast-growing technology sector. Ultimately, you really can’t expect high returns from this index given its composition.

How to generate higher returns

If you’re looking for higher returns from the stock market, I’d suggest doing three things:

1. Diversify internationally. Make sure you have exposure to top companies that are listed in the US and Europe.

2. Don’t ignore actively-managed funds. These kinds of funds are more expensive than trackers, but they can generate fantastic results. Fundsmith is certainly not the only actively-managed fund that could have doubled your money over the last five years.

3. Consider adding some individual stocks to your portfolio. Pick the right stocks, and you could really turbocharge your investment returns. 

The post This is how much £1k invested in a FTSE 100 tracker 5 years ago would be worth now appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Hargreaves Lansdown, Boohoo Group, Royal Dutch Shell, and has a position in the Fundsmith Equity fund. The Motley Fool UK has recommended boohoo group, Hargreaves Lansdown, and HSBC Holdings. 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.

Personally, I’m not convinced that FTSE 100 trackers are the best way to invest in stocks. In my view, these funds have a number of major flaws. Here’s a look at three reasons I won’t be buying a FTSE 100 tracker for my own portfolio in 2020.

Too many dogs

The first reason I’m not sold on FTSE 100 trackers is that the Footsie contains a number of low-quality stocks that I have absolutely no interest in owning.

Examples include:

• BT Group – it’s saddled with debt and is struggling to generate any revenue growth

• Vodafone – it recently slashed its dividend by 40%

• Tesco – it’s under pressure from Aldi and Lidl and losing market share at a rapid rate

• Centrica – it just cut its interim dividend by nearly 60%

There are plenty of others I’m keen to avoid too.

Overall, there are probably only around 20-25 stocks in the whole of the FTSE 100 that I actually want to own. I’m talking about high-quality, reliable dividend payers such as Unilever, Diageo, Prudential, and Sage.

So, why buy the whole index when I can focus on reliable companies that I believe have attractive long-term growth prospects?

Not enough technology

What also concerns me about the FTSE 100 index is that it has high exposure to low-growth industries such as oil & gas and tobacco, and is seriously underweight to the technology sector.

Whereas the S&P 500 index has around 22% exposure to the technology sector and contains the likes of Microsoft (which just landed a $10bn contract with the Pentagon), Apple (it’s rumoured to be launching a $399 iPhone next year), and Google (it’s at the heart of the internet and owns YouTube), the FTSE 100 has just 0.6% exposure to tech (according to the official FTSE 100 factsheet).

Given that we’re in the middle of a technology revolution right now, the FTSE 100’s lack of exposure to the tech sector worries me.

Serial under-achiever

Finally, it’s worth noting that when it comes to performance, the FTSE 100 is a serial under-achiever. For example, over the last five years (to the end of October), the index has returned just 6.3% per year. That’s a very underwhelming return. By contrast, the S&P 500 has returned 10.8% per year.

What’s worse is that since the start of the millennium, the Footsie has only risen around 5% (yes just 5%!) in capital gains terms (i.e. not including dividends). At the same time, the S&P 500 has more than doubled.

Why would I want to own an index fund tracking such a low-growth index? 

All things considered, I believe that I can do much better than just owning a FTSE 100 tracker fund. With a selection of high-quality UK stocks (both dividend stocks and growth stocks), and some top funds such as Fundsmith and Lindsell Train Global Equity that provide exposure to world-class companies listed overseas, I think it shouldn’t be too hard to outperform the FTSE 100 over time.

The post 3 reasons I won’t be investing in a FTSE 100 tracker fund in 2020 appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever, Diageo, Prudential, Sage, Apple, Microsoft, Alphabet, and has positions in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Alphabet (C shares), Apple, Microsoft, and Unilever. The Motley Fool UK has recommended Diageo, Prudential, Sage Group, and Tesco and recommends the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2021 $85 calls on Microsoft. 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.

While the full new State Pension is set to rise by £6.58 per week from April next year, Bestinvest’s research shows that for retirees living on the State Pension alone, this will only just be enough to live on.

The research revealed that the average expenditure of a retiree is £743.88 a month, compared to the average of £759.08 that retirees receiving the full New State Pension will be entitled to from April next year. That leaves no room for life’s luxuries, and there’s undoubtedly no flexibility for any unforeseen expenses.

The best way to make sure you don’t fall into this trap is to start your own savings pot right now. Today I’m going to explain how you can do this with just £10 a week and a low-cost FTSE 100 tracker fund.

Pension road map

The first thing you should do if you want to beat the State Pension is to open a SIPP.

These are a great way to save for the future because any income or capital gains earned inside one of these wrappers is tax-free, although income tax may be payable when you withdraw funds.

You’ll also receive tax relief on any contributions at your marginal tax rate, up to a maximum of £40,000 a year. The one drawback is that you can’t withdraw any money from this pension plan until you hit 55 years of age. Still, that won’t be a problem if you are saving for the future.

Many SIPP providers also offer monthly investment schemes, which allow savers to make regular investments in instruments such as FTSE 100 tracker funds. The great thing about a FTSE 100 fund is that it lets you invest in these companies, 100 of the largest firms in the world, at the click of a button.

Over the past decade, the index has produced a total annual return of 7%, and it currently supports a dividend yield of 4.5%. 

Start saving

By making regular monthly investments in the FTSE 100 via a SIPP, I calculate just £10 a week is required to nicely top-up the State Pension, if you start early. £10 a week works out at £520 a year or roughly £43.33 every month. Including tax relief at 20% on any pension contributions, the contribution value rises to £54.16. 

According to my calculations, over 40 years of saving, these monthly contributions would grow into a £139,000 savings pot, enough to provide an additional £5,560 of income every year in retirement.

Contributions of £20 a month or £108.33 after tax relief, will be worth £278,000 after 40 years of saving into the FTSE 100, which would give an additional £11,120 a year of income in retirement.

The bottom line

All in all, it is relatively straightforward to beat the State Pension and retire in comfort if you start saving as soon as possible and make the most of the tax reliefs and investment plans available.

So what are you waiting for? The best time to start saving is now.

The post How the FTSE 100 and £10 a week can help you beat the State Pension appeared first on The Motley Fool UK.

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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.

Global opportunities 

One of the main benefits Fundsmith offers over a FTSE 100 tracker, in my view, is that it’s a global equity product. This means fund manager Terry Smith has the freedom to invest in companies all over the world. By contrast, the FTSE 100 is a UK-based index that consists of the largest 100 companies listed on the London Stock Exchange.

The reason I see this as an advantage is that many world-class businesses are listed internationally. For example, companies such as Microsoft and PayPal, which both appear to have considerable growth potential, are listed in the US. If you only have exposure to the UK stock market through a FTSE 100 tracker, you could miss out on some compelling investment opportunities.

Growth focus

I also like the fact Fundsmith has more of a growth focus than the FTSE 100. As I’ve often said before, I see the FTSE 100 as a low-growth index. Given its substantial exposure to oil companies, banks, and tobacco businesses, and its low exposure to technology, I’m not convinced the index will be able to generate high returns in the future as the world becomes increasingly digital, with more of a focus on sustainability. Some 6-7% per year, over the long run, may be as good as it gets for the Footsie.

Fundsmith, with its substantial exposure to the tech sector, has the potential to generate much higher annual returns than this, in my opinion. Just look at its performance over the last five years – returning around 166% versus around 34% for a FTSE 100 tracker fund. Past performance is no guarantee of future performance, of course, yet I think there’s a good chance Fundsmith could continue to outperform the Footsie in the years ahead.

Quality businesses 

Another reason I like Fundsmith is the focus on ‘quality’ stocks – an investment strategy quite similar to Warren Buffett’s. Given Buffett’s long-term stock market success, I think investing in a fund that has a quality focus makes more sense than buying a whole index, which is likely to contain both high- and low-quality stocks.

Risks and fees

Of course, there are risks to consider with Fundsmith. Firstly, it’s a concentrated fund that holds less than 30 stocks. This means it has a more stock-specific risk than a FTSE 100 tracker, which holds 100 stocks. If one or two holdings were to underperform (which is certainly possible given that some of Fundsmith’s holdings trade at high valuations) the performance of the fund could be impacted. Additionally, with its high exposure to the US and the technology sector, there’s also geographic and sector risk.

It’s also important to consider fees. Through Hargreaves Lansdown, the annual fee on Fundsmith is 0.95%. By contrast, Vanguard’s FTSE 100 tracker has an annual fee of just 0.06%.

Overall, however, I think the risk/reward proposition the global equity fund offers is attractive. Given the choice between Fundsmith and a FTSE 100 tracker, I’d go with Fundsmith.

The post Why’d I’d invest in Fundsmith over a FTSE 100 tracker appeared first on The Motley Fool UK.

More reading

• The red lights are flashing again for Lloyds’ share price! Here’s why
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• How much do you need to invest each month into FTSE 100 shares to aim for a million?
• £10,000 invested in BAE shares at the beginning of 2026 is now worth…

Edward Sheldon has a position in the Fundsmith Equity fund. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft and PayPal Holdings. The Motley Fool UK has the following options: short October 2019 $97 calls on PayPal Holdings and long January 2021 $85 calls on Microsoft. 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.