Many people are shouting that it’s a good time to invest in the FTSE 100 right now. The index has bounced back a bit from its lows and the general flow of mainstream news suggests the coronavirus crisis could be easing.
It seems inevitable that the world will get back to work soon. Indeed, it’s gradually starting to happen in some places. The economic lockdown cannot go on indefinitely otherwise we’ll experience a deeper crisis.
Mixed outcomes from the FTSE 100
Meanwhile, you’ve probably noticed several individual company shares have already shot up from their recent lows. In the FTSE 100, I’m thinking of names such as AstraZeneca, British American Tobacco and Reckitt Benckiser. But others still languish, such as Barclays, BT, Carnival and International Consolidated Airlines.
The difference in the performances of those stocks makes sense because the crisis has affected some underlying businesses more than others. But it does mean it can be challenging to pick the ‘right’ FTSE 100 stocks to invest in.
However, we don’t have to choose. One elegant solution is to invest in an FTSE 100 tracker fund. I think doing that would be a great idea right now. One of the main advantages of such an approach is the tracker fund will give you instant and automatic diversification across the 100 or so firms listed in the index.
That’s a big bonus because it can be tough to achieve cost-efficient diversification across many different shares unless you have deep pockets with lots of money to invest. And with smaller sums, we risk ending up with our money concentrated in just a few companies’ shares. If we pick a duffer or two, that could end up being a big problem.
And one of the great advantages of investing in the entire FTSE 100 is that it filters out the worst-performing stocks. If individual companies perform badly the index ejects them when their share prices fall too far. It then promotes up-and-coming stocks that are performing well to replace the poor performers.
Capturing broad growth
You’ll also be exposed to all the growth in the FTSE 100. And that means you’ll capture rebounding cyclical shares such as Whitbread and Lloyds when the next up-leg in the economic cycle arrives. And you’ll also benefit from ongoing growth form shares that held up well through the crisis because they were backed by more defensive businesses.
I think an FTSE 100 index tracker will likely be a decent vehicle for investing for the recovery that will follow the current crisis. I’d select the accumulation version of the tracker fund rather than the income version so that dividends will automatically be rolled back in. And I’d hold the tracker fund within a tax-efficient ‘wrapper’, such as Stocks and Shares ISA or a SIPP.
Finally, tracker funds have low charges compared to buying the shares of individual FTSE 100 companies. To me, there’s a lot to like about the option.