As I get older and more experienced as an investor, my investing efforts are increasingly aimed at building a portfolio of quality stocks I can hold indefinitely.
However, the reality is that the world keeps turning and things change. Even legendary long-term investor Warren Buffett sells stocks occasionally.
No single business is guaranteed to thrive forever. But there is one stock market asset I’d be happy to own until I retire.
The top 100
My one lifetime pick would be the FTSE 100. This is the index of the 100 largest companies listed on the London Stock Exchange.
There are three reasons why I’d be happy to own the FTSE 100 forever.
Automatic selection: With a stock portfolio, you have to choose which shares to buy, and whether to sell any.
The FTSE 100 is effectively a self-selecting portfolio. Smaller companies that perform well get promoted into the index. Larger companies with problems get kicked out. The end result is that you will always own a portfolio of large and relatively successful businesses.
Diversification: The FTSE 100 does tend to have a heavy weighting towards the financial and natural resources sectors. But it also contains many global champions from other sectors, including £10bn+ companies such as Unilever, GlaxoSmithKline, Diageo and BAE Systems.
Overall, I believe the FTSE is always likely to offer adequate diversification for most investors.
Dividends: Most of the companies in the FTSE 100 pay dividends. At the time of writing, the index offered an average dividend yield of 4.5%. This looks very attractive to me.
Indeed, if the market stayed flat and you simply reinvested this yield for 10 years, you’d still see a 55% gain on a lump sum invested today.
What if the market crashes?
Of course, the market is unlikely to stand still for 10 years. What’s more likely is that it will go up — and down — during this period.
Market crashes often scare investors out of the market. But as long as you still have a few years to go until you retire, market crashes can actually be good news.
The reason is simple — you get to buy the index at a heavily-discounted price. This has the effect of lowering the average price you’ve paid for your investments. So when the market recovers, your gains are bigger.
This ‘trick’ can boost your wealth
For example, let’s say you buy two ‘units’ of the FTSE 100 at 7,000. The market then falls to 6,000, so you buy three more units. The average price you’ve paid for all five units is 6,400. So if the market then recovers back to 7,000, your investment will show a 9% profit.
This approach is known as pound-cost averaging. It’s a great technique for building long-term wealth. All you have to do is set up a monthly direct debit into a cheap FTSE 100 tracker fund. Then simply sit back and forget your investment until you get closer to retirement.
I’d buy today
Warren Buffett has said that after his death, his investment advice for his family will be to put most of his cash into an S&P 500 tracker fund (the US equivalent of the FTSE 100).
My advice would be to follow Mr Buffett. The FTSE 100 looks good value to me today. I’d be happy to put my money into the index.