Investing money in a low-cost index fund could be the key to financial freedom. These investment vehicles have proven to be powerful wealth-building devices, enabling investors to grow a portfolio with minimal effort or oversight. While the short-term performance of stock markets can be erratic, the long-term trends are clear. And index funds are a terrific way to capitalise on the upward trajectory of financial markets.
But how much money can investors actually make with this strategy? And is picking individual stocks a far better way to build wealth? Let’s explore.
Index fund performance
Right now, there are countless index funds to choose from. But almost all of them work the same way with some minor differences. The thing that investors need to pay the most attention to is the index they’re tracking and the fees they’re charging.
Thanks to algorithmic trading, most tracker funds have become incredibly cheap, with fees ranging from 0.05% to 0.15% depending on the underlying index. However, the underlying index ultimately determines performance. And depending on which one an investor chose to follow over the last five years, the returns have been vastly different.
Index
FTSE 100
FTSE 250
FTSE All-Share
S&P 500
Nasdaq 100
5-Year Total Return
32.8%
25.4%
32.4%
94.7%
146.5%
Value of £1,000 Investment
£1,328
£1,254
£1,324
£1,947
£2,465
Looking at the results, its clear UK shares have been lagging significantly behind their US counterparts. The Nasdaq 100, in particular, has been putting the world to shame, demonstrating the power of having a plethora of tech stocks.
But, this exceptional performance has come at a cost of significantly higher volatility. Between 2022 and 2023, the Nasdaq lost more than a third of its value. By comparison, the FTSE 100 was actually up over the same period, demonstrating its resilience to market turbulence.
Depending on what an investor’s risk tolerance and objectives are, the weaker performing indices may still prove to be the wiser investment. But what if it was possible to have the best of both worlds through stock picking?
High returns, low volatility
Tech stocks have understandably gained a reputation for being volatile in recent years. Yet, digging a bit deeper reveals that this isn’t always the case.
PTC Inc (NASDAQ:PTC) is a prime example of a tech-driven enterprise that’s delivered a stagging 155% return over the last five years while also being relatively stable. In fact, during the 2022 stock market correction, when tech stocks were in freefall, PTC remained flat, outperforming its parent index significantly.
The company operates behind the scenes of over 28,000 enterprises, providing a suite of software tools to help with product design and lifecycle management. That includes industry titans like Boeing, Volvo, and HP, among others. And with it lying at the heart of operations, PTC has cultivated sticky relationships that have translated into pricing power as well as switching costs.
Of course, it’s still not a risk-free enterprise. The group has to fend off a lot of competition, and management has a habit of executing a lot of bolt-on acquisitions that could backfire if they fail to live up to performance expectations.
Nevertheless, it demonstrates that picking individual stocks, while often riskier, can sometimes be the more lucrative and less volatile path when investing in the right companies.
The post If I invest £1k in an index fund, how much money will I make? appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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 diverse range of insights makes us better investors.
