This is a question that’s been facing investors for some time, and has been labelled as “the great debate” by some analysts.

To solve the question, Jack Bogle — an index fund pioneer and founder of Vanguard — recently set out to prove that indexing is the best way to go for most investors with a series of charts. 

Bogle’s figures 

Bogle’s figures revealed that, thanks to fees and charges alone, the average actively managed US equity fund will underperform a standard, low-cost tracker fund by 2.64% per annum.

Now, an extra 2.64% per annum might not seem like much, but the additional returns really stack up.

Indeed, Bogle’s figures showed that over 50 years a $10,000 investment compounded at 6.64% per annum — the standard tracker return — would turn into $248,000. However, $10,000 compounded at just under 4% for 50 years — a return including active management fees — would turn into $70,387.

That means that due to excessive management charges, investors who put their money to work in actively managed funds would have lost out on $177,610 worth of gains over the period studied.

Slow and steady 

Other research also supports the argument for indexing. 

Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE 250 has outperformed its blue-chip peer by around 90% excluding dividends. And finally, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%. 

On the other hand, according to research conducted by a number of financial institutions, the average private investor has only returned 2.5% per annum including dividends. 

What’s more, with an estimated 80% of active fund managers failing to beat the market, it’s easy to conclude that tracker funds are the best way to go. 

Low-cost 

There are some very low-cost trackers out there for you to take advantage of. For example, the BlackRock 100 UK Equity Tracker, Fidelity Index UK and db x-trackers FTSE 100 UCITS ETF (LSE: XUKX) all charge a lowly 0.09% per annum in management fees.

For the FTSE 250, the iShares FTSE 250 UCITS ETF charges an annual management fee of 0.4% and the HSBC FTSE 250 Index fund charges around 0.3% per annum. 

Low-cost FTSE All-Share trackers include the Vanguard FTSE UK Equity Index, which charges 0.08%, Fidelity Index UK which offers index replication for 0.09% (0.07% if purchased through Fidelity) and the Legal & General Tracker Trust charges 0.10%.

The income problem 

Unfortunately, while index trackers may be a low-risk, low-cost way to grow your wealth over time, income investors are likely to be disappointed.

Indeed, the HSBC FTSE 250 tracker only offers a dividend yield of 2.2% and the BlackRock 100 UK Equity Tracker’s dividend yield stands at 2.6%. 

So, if you rely on your investments for additional income, then it could be sensible to buy a selection of dividend champions to sit in your portfolio alongside a low-cost tracker.

The post The Case For Buying A FTSE 100 And FTSE 250 Tracker Gets Even Stronger appeared first on The Motley Fool UK.

Viva Aviva

Aviva (LSE: AV) has started sputtering into life, rising 56% over two years, although growth has flattened lately.

This is a company in turnaround mode, but its Q3 interim statement suggest the corner is in sight, with new business up 15% year-on-year to £690m, and strong performance in Europe and Asia.

As emerging markets slow, Aviva’s lack of Asia exposure may now be a plus.

Say Barclays

I’ve been predicting a Barclays (LSE: BARC) fightback all year, and mercifully, it’s finally happening. It’s up more than 7% in the last week, helped by surprisingly lenient leverage ratio rules from the Bank of England.

Its Q3 results beat expectations with a 5% increase in profits before tax to nearly £5bn. Barclays still has far to go to restore its reputation, not to mention its dividend, and its investment banking division looks burnt out.

But really, do you think it won’t get there?

On The Monitise

Mobile payments could be the future, and Monitise (LSE: MONI) is a good way to play it. Again, this company has suffered recent troubles, as profits slipped and Visa exited its investment in the company.

At today’s 31.75p, Monitise has fallen sharply from its 52-week high of 82.75p. But that makes now a tempting entry point.

UBS recently issued a ‘buy’ recommendation, with a target price of 80p. If you’re feeling brave, simply light the blue touch paper

Tesco

Britain’s biggest retailer Tesco (LSE: TSCO) has imploded, messily, before our very eyes. If you believe in investing at the point of maximum pain, here’s your chance.

Early noises suggest new boss Dave Lewis has grasped the scale of the challenge, and selling off its banking arm and Asian businesses could raise the billions Tesco needs to conquer the high street again. Hold on tight.

One for luck…

After recent wobbles, the Santa rally is on. Trading at 13.69 times earnings, the FTSE 100 is hardly overvalued. It has had a troubled year, down 4% so far, but that gives it a nice platform to spring back.

Buying a low-cost index fund such as db x-trackers FTSE 100 UCITS ETF (LSE: XUKX), which charges just 0.09% a year, is a safer way of tapping into today’s stock market’s long-term growth potential.

The post 4 Growth Stocks Set To Explode: Aviva plc, Barclays PLC, Monitise Plc And Tesco PLC appeared first on The Motley Fool UK.

Indeed, it’s often said that many private investors underperform the market, although until recently there have been no definitive figures detailing to what degree investors actually underperform. But now we know, and the numbers are terrifying. 

Lagging the index

Over the past 20 years the FTSE 100 has risen at a rate of around 5.4% per annum, excluding fees, dividends and inflation — dividends received are likely to cancel out fees and inflation anyway. During this period, the market has seen the dotcom bubble and the financial crisis: two events that have sent the FTSE 100 surging to a high of nearly 7,000 and crashing to a low of around 3,000. 

In comparison, over the same 20-year period, according to research conducted by a number of financial institutions, the average investor has only returned 2.5% per annum including dividends. This paltry return is, in a word, shocking.

In fact, the average investor underperformed nearly every financial instrument bar one over the 20-year period studied. The only market that put in a worse performance than the average investor over this period was that Japanese stock market. Some of the instruments that performed better than the average investor over the past 20 years include: cash (3% p.a.), bonds (3% – 8% p.a.), hedge funds (8% p.a.), REITS (10% p.a.) and all emerging markets (6% – 10% p.a.).

All in all, if you include inflation, in real terms over the past 20 years the average investor has returned 0% p.a., while the FTSE 100 has returned over 5%. 

Slow and steady

Many analysts agree that the average investor underperforms the market because they trade too much. As a result, fees eat away at returns and many investors often buy high and sell low, erasing much of their capital in the process. 

So, it seems as if the best way to avoid these dismal returns and rack up a performance that is at least in line with the wider market, investors should look to tracker funds. 

It’s easy to see how a simple tracker fund can transform your portfolio. Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.

And remember, these returns exclude the impact of dividend reinvestment. According to my figures, a £1000 investment in the FTSE All-share, yielding 3% per annum, with capital growth of 5.9% would turn £1,000 into £8,200 over a period of 30 years.

Of course, this is excluding costs, but there are some very low cost trackers out there for you to take advantage of. In particular, BlackRock 100 UK Equity Tracker, Fidelity Index UK charges 0.09% and the db x-trackers FTSE 100 UCITS ETF (LSE: XUKX) charges a lowly 0.09%.

For the FTSE All-Share, Vanguard FTSE UK Equity Index charges 0.15%, BlackRock UK Equity Tracker offers index replication for 0.16% and the Legal & General Tracker Trust charges 0.16%.

The post The FTSE 100 Will Always Beat You appeared first on The Motley Fool UK.

The expert investors among you may sigh with disappointment, but for the rest of us without the time and skill to pick stock-market winners…

…buying into the FTSE 100 (FTSEINDICES:^FTSE) is the easiest way to benefit from the long-term power of the stock market.

You can track the FTSE 100 through a wide number of funds, including exchange-traded funds such as the iShares FTSE 100 ETF (LSE: ISF), the DB X-Trackers FTSE 100 ETF (LSE: XUKX) and the Vanguard FTSE 100 ETF (LSE: VUKE).

And even the world’s richest investor, Warren Buffett, remains a fan of ‘index tracking’. He wrote this earlier in the month:

“The goal of the non-professional should not be to pick winners… but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost […] index fund will achieve this goal.“

Buy into the FTSE 100 and you will own a cross-section of top British businesses that I’m sure is bound to do well over time.

I mean, you’ll back blue chips such as Royal Dutch Shell, HSBC, GlaxoSmithKline, Vodafone, Diageo, Unilever, British American Tobacco, ARM, Next, Hargreaves Lansdown… alongside another 90 bellwether UK stocks all rolled into one simple fund.

It really is the ‘no-brainer’ investment decision of this ISA season — and every other ISA season beyond that.

And when you consider…

• The FTSE 100 is currently paying a dividend yield of 3.5%, much higher than the interest paid on a typical Cash ISA;
• Dividends from FTSE 100 companies are expected to advance 6% on aggregate this year, according to Capita Asset Services;
• The FTSE 100 index trades at about 13 times the profits made by all 100 companies, which is seen as ‘below average’ by many investors and could mean the market is undervalued, and;
• The FTSE 100 index remains below its record high of 6,930 set at the end of 1999, which suggests the market has some catching up to do.

…then it would seem there is no better time to buy than right now. In fact, by backing the entire FTSE 100, you’ll be able to sit back, relax and simply prosper from the wider market’s progress…

…without the worry of your hand-picked shares hitting trouble or your hand-picked fund manager going off the boil.

And there is a lot to be said about that!

The post Why The FTSE 100 Is A Top ISA Buy appeared first on The Motley Fool UK.