Sometimes after the long Christmas holidays, doing a lot of research into buying individual shares might sound tiring (though, for some people, a new year brings new opportunities). In any case, if I had decided not to buy individual shares this year and simply put a spare £1,000 into the FTSE 100 index back in January, here is what would have happened.
How investing in an index works in practice
By the way, when I talk about putting money into an index, I do not mean buying all of the shares in that index myself.
Rather, I would simply have bought into an index tracker fund. Whereas a lot of investment funds pay managers to decide what shares to buy, a tracker fund does what it says on the tin.
By buying shares in such a tracker, I would be investing in a portfolio that is meant to represent as closely as possible a specific index (in this case, the FTSE 100).
There are lots of different such funds available, some with what I see as very competitive pricing structures.
Good year for blue-chips
So far this year, the FTSE 100 has performed well. The index is up 7.3% since the start January, so my £1,000 investment would now be worth roughly £1,073.
By the way, as I mentioned above, a tracker fund aims to replicate the index as closely as possible. But as prices of individual shares change constantly, that is a moving target – and the fund share price itself can move.
So for example, the snappily named tracker Vanguard FTSE 100 UCITS ETF is actually up 7.8% (not 7.3%) so far this year. That can work both ways. Even sophisticated trackers sometimes do slightly better than the index but sometimes slightly worse.
As well as capital gains, I would be earning passive income from my holding. The dividend yield on the FTSE 100 at the moment is 3.6%. So I would be on course for around £36 in dividends by the end of the year, give or take (I say give or take as there can be a lag between buying a share and receiving any dividends from it).
Why didn’t I do this?
So parking £1,000 in the FTSE 100 at the start of the year would have worked out well for me. But I chose instead to invest in individual shares from the blue-chip index, such as Diageo (LSE: DGE).
Why? An index covers the waterfront. Picking individual shares to buy could mean more concentrated risk – Diageo’s recent sales woes in Latin America are a problem. I see weak consumer spending as a bigger risk than industrially-focused FTSE 100 firms like Ashtead.
But picking individual shares could also potentially offer me more price gain potential than an index.
While Ashtead has grown 168% in five years, the Diageo share price has fallen by a quarter. I saw that as a buying opportunity for me.
The firm has strong, premium brands with no direct competitors in some cases. That gives it pricing power. And that can translate into profits — £3.9bn last year – possibly funding dividends.
At 3.4%, the Diageo dividend yield is close to the FTSE 100 average. The payout per share has grown annually for decades.
The post £1,000 parked in the FTSE 100 at the start of the year, would be worth this much now appeared first on The Motley Fool UK.
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C Ruane has positions in Diageo Plc. The Motley Fool UK has recommended Ashtead Group Plc and Diageo Plc. 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.
