Better investing 100 index index trackers provide a low cost way to build a diversified portfolio that will outperform the average active investor. Index trackers come highly recommended by some of the biggest names in investing.
With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low cost. Safety in numbers Like other funds, tracker funds enable lots of investors to club together to increase their buying power. For example, trackers make it possible to invest in all the world’s stock markets via just one global index fund. Trackers are therefore a good way for everyday investors to get into the stock market without exposing themselves to the dangers of individual stock-picking. Risks and costs are reduced thanks to the scale and diversity of the fund. And while you’ll never beat the market’s performance with a tracker, you won’t lag it by much, either.
The aim of a tracker fund is to reproduce the returns of a specific market index. An index is a bit like the financial equivalent of a poll. The body behind some particular index regularly surveys a sample of the market to get a snapshot of the bigger picture. There are many weird and wonderful indices out there, from the All-Peru index to the Volatility Arbitrage index. But virtually all of us only need to concern ourselves with the biggest ones around. Which indices track that market, and how the indices differ.
You can then make an informed choice about which tracker to go for. For example, UK equity is covered by a number of indices, the two most popular being the FTSE 100 and the FTSE All-Share. FTSE 100, FTSE 250 and FTSE Small Cap indices. So if you want the most diversified index, you’d pick the All-Share.
If you only cared about Britain’s biggest companies, you’d pick the FTSE 100. You can find out which index a tracker mimics by reading its fund factsheet. For more about the indices, visit major providers like FTSE and MSCI. Gain with less pain A tracker’s job is to deliver the return of its index. The key point is that trackers don’t try to pick the winners.