At around 7,600 points today, the FTSE 100 is up almost 10% since last October, after dividends. That’s notably ahead of its 8% historical average for an entire year. And for many patient investors who’ve been holding on throughout the recent storm, this upward momentum serves as comforting validation.
However, this recent positive performance may just be the starting point. Analyst forecasts for the UK’s flagship index look increasingly bullish for the second half of 2024, and the effects of economic turbulence are expected to settle.
Forecasts always need to be taken with a pinch of salt. But they can serve as a useful signal of good times ahead, especially when multiple institutions start becoming more bullish as it signals rising market sentiment.
So let’s assume these bullish predictions are correct. That means buying top-notch stocks today could lead to tasty returns by the end of this year and beyond. With that in mind, here’s how I’d go about investing £10k in the UK’s flagship index today.
Index fund or individual stocks?
The easiest way to put money to work and replicate the gains generated by the stock market is an index fund. These instruments typically come with negligible fees and require entry-level knowledge to use. Diversification is automatically handled, as is portfolio management.
Considering all an investor has to do is add money and wait, index funds are a popular and powerful vehicle for building wealth. And if I wanted to put my investments on autopilot, then investing my £10k into a low-cost FTSE 100 fund would be a smart way to do it.
However, this passive index strategy comes with one major disadvantage – it’s impossible to outperform the benchmark index. An 8% average annualised return is nothing to scoff at. But compared to the double-digit gains achieved by stock pickers like Warren Buffett, it can easily pale in comparison.
Achieving market-beating returns is only possible by picking individual stocks. This alternative strategy is far less forgiving and comes with significantly higher levels of risk. After all, investors can no longer stick their heads in the sand.
They have to constantly stay up to date with the performance of their chosen businesses and that of their rivals to ensure no new threats are emerging on the horizon. Not to mention the extra effort required to build and manage a portfolio. Yet, if executed successfully, this extra effort can send an investor’s wealth to new heights significantly faster than what’s possible with just an index fund.
Investing £10k
For those who have just started their investment journey and are fortunate to have £10k as starting capital, this is more than enough to build a well-balanced, diversified portfolio. However, it’s important not to simply start buying stocks for the sake of diversification.
This is a common mistake many novice investors make. And it leads to mediocre businesses, dragging down the performance of the top-notch ones. It’s also important to realise that this capital doesn’t need to be invested all in one go.
Since finding fantastic companies at bargain prices takes time, it may be smarter to slowly diversify a portfolio over time, bolstering existing positions should a better price emerge later.
