Investing in a FTSE100 A tracker fund is an easy way to ensure portfolio diversification by gaining broad exposure to the UK’s largest stocks.
However, some investors prefer to try to beat the market. While the risk of buying individual stocks is greater, so are the potential rewards.
Let’s examine the returns of the FTSE 100 over 10 years and compare them to an individual stock selection strategy.
FTSE 100 performance
There are several FTSE 100 tracker funds that investors can buy. In reality, the differences between these index funds are negligible, apart from minor differences in annual fees.
A popular and cost-effective fund is the Vanguard FTSE 100 UCITS ETF (LSE: VUKE).
In July 2014, individual shares of this index fund were trading at £30.36. With an investment size of just over £5,000, I could have bought 165 shares.
The market price has risen by 17% in a decade and is now at £35.56. Accordingly, my original investment would have risen to £5,867.40 assuming I had held these shares for 10 years.
That’s not the whole story though. The majority of my profits came from dividends. Assuming I hadn’t reinvested my cash payouts in more shares, I could add £2,081.19 to the total, making my final total £7,948.59.
This corresponds to a total return of almost 59%.
Investing in individual stocks
That may sound like a reasonable return, but it’s important to note that this figure is a nominal return, not a real one. When inflation is taken into account, the actual figure is considerably lower.
Furthermore, if I had invested £5,000 in a FTSE 100 tracker fund over the last ten years, there would have been an opportunity cost. I could have invested that amount in individual stocks instead.
For example, London Stock Exchange Group (LSE:LSEG) is a FTSE 100 stock that has significantly outperformed the index in recent years.
The share price has risen by around 430% in 10 years and the company also pays a constant dividend. Such outperformance is nothing to be sniffed at.
Although past performance is no guarantee of future returns, I believe that the London Stock Exchange Group has a good chance of being one of the leading stocks in the FTSE 100 in the coming years. In my view, the stock is well worth considering.
A strategic partnership with Microsoft Building customized generative artificial intelligence (AI) models could be a lucrative source of growth. After all, the company has a wealth of valuable data at its disposal. By using AI effectively, the company should be able to significantly improve its customer offering.
Admittedly, a lack of new IPOs in the UK could weigh on the company’s performance, and a price-to-earnings (P/E) ratio above 26 means the shares are more expensive than the FTSE 100 average.
Nevertheless, I believe that the overall risk-reward profile looks attractive.
The conclusion
While some stocks like the London Stock Exchange Group achieved record highs, other companies lagged behind the FTSE 100 index. For example, Vodafone Stocks have lost nearly 63 percent of their value over the past decade.
More cautious investors who are concerned about volatility may want to stick with index funds, and that’s fine. But there’s a happy medium. Investors can consider buying both index funds and individual stocks, and that’s exactly what I do.
The post “If I had invested £5,000 in a FTSE 100 index fund 10 years ago, this is what I would have today!” appeared first on The Motley Fool UK.
Further reading
Charlie Carman holds positions in the Vanguard FTSE 100 UCITS ETF and Microsoft. The Motley Fool UK has recommended Microsoft and Vodafone Group Public. The views expressed on companies mentioned in this article are those of the author and may therefore 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 broad range of insights makes us better investors.
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