How to Invest in the Stock Market Safely and Smartly

In the long-term, the stock market has done better than virtually any other form of investment. Index trackers could be your best option as they are cheaper and less risky than buying individual shares.

The city's best kept secret

stock market index tracker

There is one simple way to capture as much as possible of the market’s gains. Advisers or investment professionals are reluctant to tell you what it is because they earn very little money from it. To link your fortune to that of the stock market, put your money in an index tracker—a unit trust or investment fund that tracks the performance of all shares. Index trackers make no judgements about what is likely to happen or which companies, sectors or regions will probably do well. They simply invest the money in the same shares that form one of the indexes measuring overall stock-market growth.

For example, many track the FTSE All Share Index, which measures the value of shares in about 700 companies traded in London. These funds will invest in those companies in proportion to their size in the index. Others follow the 100 biggest UK companies or the top 500 in Europe. Tracker funds such as this have three advantages over more traditional funds where money is invested according to the opinions of a fund manager.

First, they cost a great deal less to run. Fund managers and the teams of analysts who support them don’t come cheap. With a tracker, you don’t need them. Instead of paying set-up fees of, say, five per cent up front and then 1.5 per cent a year out of your investment, you need pay nothing to set the account up and half a per cent or less to run it.

Second, if you believe (as history shows) that shares rise overall in the long-term, trackers hitch your money firmly to that wagon rather than the opinions of an individual.

Third, in the long-term, tracker funds tend to outperform individual funds. Despite what fund managers may tell you, no one can consistently do better than the whole stock market. Research by consultancy W. M. Company for Virgin Money looked at the performance of 48 actively managed funds between 1980 and 2000 and found that 79 per cent failed to beat the benchmark FTSE All Share Index. It’s true that some managers do well for a while, but it’s impossible to predict who they’ll be. Research for the Financial Services Authority found that past performance was no guide to future performance except in one way—a bad fund manager will consistently do worse than an index tracker fund.

So, in the long-term, leave it to the market, says Bruce Jackson, managing director of award-winning online personal finance advisers The Motley Fool (fool.co.uk). “Why pay more to buy into actively managed funds when a cheap, flexible index tracker beats the majority hands down?”

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