If you’ve never considered adding a tracker fund to your investment portfolio, there are good reasons why you should give them another look.
Trackers cover a broad range of stocks, spreading your investment across a number of different companies.
By doing so, they can give returns similar to the performance of those individual stocks and shares combined.
Tracking a collection of shares or bonds in this way is an index – as opposed to an active fund which is directly managed in an attempt to outperform the equivalent index.
Investing in trackers has risen in popularity over the past few years, and it’s a great option for beginner to intermediate investors.
Why start investing with a tracker?
If you’re only just getting started as an investor, trackers are a good way to cut through the large amounts of information that are available to you.
They diversify your portfolio by definition, so you’re not linked to the performance of a single stock, giving you the insulation of investing in a broader index instead.
Watching the performance of a tracker is a good way to gain some confidence as an investor, before you start to look at other ways to invest.
Returns are not guaranteed – there is always risk involved in speculative investing – but it can be easier to do the homework and decide which tracker to invest in.
Where to begin?
Trackers can give you access to different countries’ stock markets, so how do you choose where to begin?
If you want to keep it close to home, there are plenty of UK-based trackers, including funds like the Legal & General UK Index which tracks the FTSE All-Share.
That pegs your investment to the performance of around 650 of the UK’s most prosperous SMEs and large corporations.
If you want to live the American Dream, consider the Legal & General US Index instead. This aims to match the performance of the FTSE USA Index, which is a similar size to the All-Share.
Legal & General also offer the International Index Trust which follows the FTSE World Index with even broader coverage across more than 2,300 companies worldwide.
This kind of global tracker balances your risk and reward, with some of your funds invested in stable, mature economies with reliable returns and others speculated on emerging high-growth economies.
Are active funds better?
Actively managed funds rely on the expertise of a seasoned manager to outperform the index, achieving better returns than an index-based tracker.
In principle this should mean you get a better rate of return on the funds you invest, but if the manager gets it wrong, you could make less – or even make a loss.
Trackers are a good way to start until you feel more confident about following the performance and all of the information that comes from an investment.
Once you feel ready, then you can start to incorporate more active funds into your portfolio, building on your own knowledge to ensure that you get stronger returns in the future.
Not just for beginners
You don’t have to be a beginner to benefit from trackers – they can form a useful part of even an experienced investor’s portfolio.
Active funds often suffer from a lack of diversification, as their manager may prefer to invest in a fairly small group of companies or in specific national economies.
With a tracker, you gain automatic diversification across the index it tracks, along with good awareness of that diversification so you can keep a close watch on it yourself.
Diversification is always a hallmark of a healthy investment portfolio, ensuring that should one part of the index drop, you have a better chance of more than making up that lost value from elsewhere in your portfolio, even within the same tracker.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.