If you have £3,000 to invest and want to buy an investment that you can rely on for the rest of your life, then I highly recommend purchasing an FTSE 100 tracker fund.
Today I’m going to explain why I believe this single investment is the best place to invest your money for the long term if you are looking for income and capital growth.
Unique strengths
The FTSE 100 is a unique stock index. Around 70% of the index’s profits come from outside the UK, which makes it one of the most globalised stock market indexes in the world.
At the same time, with a dividend yield of around 4.5% at the time of writing, the FTSE 100 supports the highest dividend yield of any developed market stock index.
This makes the index an excellent investment for income seekers. The 4.5% dividend yield is an aggregation of all of the FTSE 100 constituents’ dividends, which makes it extremely dependable, in my opinion.
You could get a higher yield from other funds, but these funds have one drawback. As one of the world’s largest and most liquid stock indexes, you can buy a FTSE 100 tracker today with an annual cost of just 0.07%.
The low cost is a tremendous advantage for investors. The average active fund on the market today charges around 0.75% in management fees, which means that on a sum of £10,000 invested for 10 years at an average annual rate of return of 6%, an investor would pay £1,227 in fees.
With an average annual management fee of 0.07%, fees would amount to just £118, improving the investor’s return by £1,109 or 6.6%.
Manager mistakes
Another thing you do not have to worry about with a low-cost FTSE 100 tracker fund is manager mistakes. As the fund is only designed to track the underlying index, managers do not have to pick individual stocks. This means there is no chance they can underperform the market.
The combination of low fees, a 4.5% dividend yield, global diversification, and the lack of manager risk involved with a tracker are the reasons why I think a FTSE 100 index tracker would be a great investment that can pay you for the rest of your life.
You may be able to get higher returns from other funds on the market, but this will also come with more volatility, risk, and higher fees.
As Neil Woodford’s investors have unfortunately found out, sometimes, it is better to accept a lower, predictable return than try to shoot for the stars and lose a lot of money.
The bottom line
So, that’s why I would hold a FTSE 100 index tracker if I had just £3,000 to invest today.
I would use the index as the base of my portfolio and spread my money into other investments with additional contributions during the following months or years.
This would allow me to take more risk, but rest safe in the knowledge that the core of the portfolio was producing a steady income from a globally diversified portfolio of stocks.