The FTSE 100 is home to some of the largest enterprises in the UK. And while they may be listed on the London Stock Exchange, plenty have operations that span the entire planet.
As such, investing in the UK’s flagship index gives investors the opportunity to own proven enterprises that have the advantage and stability of size on their side.
Investors can’t directly buy shares in an index since they’re ultimately just a weighted list of companies to track as a benchmark. However, there’s nothing stopping someone from investing in an index fund that replicates this list as a portfolio. And those with a higher tolerance for risk may seek greater returns by picking individual index stocks.
With that in mind, let’s take a look at how investors can put £10,000 to work using the FTSE 100.
Index funds verses stock picking
Index investing is arguably one of the most popular ways to benefit from the stock market. By using a low-cost fund, investor capital can be put to work replicating the performance of the stock market. And best of all, they don’t have to think about research, diversification, or portfolio management.
With the FTSE 100 delivering an average total return of around 8% over the last four decades, index funds serve as an easy solution to grow wealth. The downside is this method makes it impossible to beat the market.
So for those who want to strive for double-digit gains like billionaire investor Warren Buffett, stock picking might be the better option to invest £10,000.
Carefully crafting a portfolio of individual stocks is no easy feat. It demands far more discipline, knowledge, and research to pull off. And it’s not uncommon for a new investor to mistake luck for skill, leading to a potentially disastrous performance later down the line. In fact, that’s precisely what happened to me in the first year of my personal investing journey.
However, there are several tactics investors can use to help identify exciting opportunities and manage risk.
Finding success
Stock picking isn’t a skill that can be learned overnight. It’s a lifetime process that demands wide knowledge, depending on which industries an investor is exploring. Yet, one of the best places to start, in my opinion, isn’t within the financial statements but the business itself.
Discovering what a company does, how it makes money, and how it spends money is my preferred first step to understanding any potential investment. It can quickly reveal what sort of opportunities lie ahead as well as highlight potential weak spots that merit further investigation.
FTSE 100 businesses can sometimes be a challenge to break down due to their size. Several of these corporations can operate with complex structures that can obscure reality. But as it turns out, some of the best-performing investments from my portfolio have often been the simplest.
So if I was looking to invest £10k in a hand-picked collection of FTSE 100 shares today, I’d focus on filtering out the hard-to-understand companies and then investigate the potential of the firms that remain.
