Investing in the FTSE 100 using an index tracker fund is arguably one of the best ways to put an investment portfolio on autopilot. After all, shareholders end up being instantly diversified and don’t have to think about rebalancing or spending time researching individual businesses.
A downside to this method of investing is that it becomes impossible to beat the average performance of the stock market. In other words, an investor’s wealth will only grow as fast as the index they’re invested in.
But that doesn’t mean considerable wealth can’t be unlocked in the long run. In fact, those invested in the FTSE 100 over these past five years have done exceedingly well for themselves.
Investing in the FTSE 100 in 2019
As of the end of May, the FTSE 100 has delivered a total shareholder return of 39.2% over a five-year period. That’s the equivalent of a 6.8% annualised return. And those who put £5,000 to work back then are now sitting comfortably on £6,960.
Compared to the last decade, the index’s performance has actually improved, mostly thanks to this year’s double-digit surge on the back of falling inflation. Yet that’s still below the long-term average of 8%. The UK’s flagship index continues to deliver respectable returns for more conservative investors. However, there has been a downward trend in performance over the last couple of decades.
As a market-cap-weighted index, the biggest companies on the London Stock Exchange, like Shell (LSE:SHEL) and AstraZeneca, ultimately have the highest level of influence on overall performance. However, since these enterprises have become so large, achieving high levels of growth is becoming increasingly challenging. And while there are some firms delivering double- or even triple-digit returns, none are sufficiently high on the chain to materially drive the index upward.
To buy or not to buy?
Not every investor is out to achieve the highest possible returns. Some are more interested in preserving their wealth, while others prefer taking a more conservative approach to finance. In these cases, a FTSE 100 tracker fund makes a lot of sense.
Take Shell as an example. It’s one of the largest energy businesses in the world, surpassing many of its peers like BP in its strategy to increase oil & gas output. Considering both commodities continue to see high demand, this approach has been quite successful so far. And with a steady migration towards renewables mapped out, the long-term viability of this business remains intact.
Given that almost every household and business needs access to energy, the group’s hardly in short supply of customers. And given that demand for electricity is on the rise, that doesn’t seem likely to change.
But with prices driven by the market, Shell doesn’t have much pricing power. And even if energy prices surge, this quickly attracts fresh competition, which eventually brings prices back down. In fact, that’s precisely what happened in 2022.
Owning a wide range of Shell-sized enterprises isn’t risk-free, but it does provide some reliability and stability. Sadly, these properties are seldom linked to high-flying stocks. And suppose investors want to start achieving market-beating returns. In that case, they’ll have to explore beyond the world of index funds and into smaller individual businesses.
This post was originally published on Motley Fool
