A lot of financial experts and influencers these days say that the only investment needed is a simple global index tracker fund, such as the Vanguard FTSE All-World UCITS ETF (LSE: VWRP). Buy this type of fund for your Stocks and Shares ISA or SIPP and you’ll pick up average market returns and be set for life, they say.
But is this really true? Let’s discuss.
A lot to like
I’m a huge fan of global index funds and I own a few across my various investment accounts. With these products, I get exposure to stocks in multiple countries, and all the big names such as Apple, Amazon, and Tesla.
Meanwhile, ongoing costs are very low. Overall, there’s a lot to like.
No silver bullet
That said, I’m not 100% convinced that these products are a ‘one-stop-shop’ when it comes to generating wealth. You see, these funds aren’t as diversified as many think they are. For example, the Vanguard FTSE All-World UCITS ETF has roughly 65% exposure to the US stock market today.
Now that’s worked out well over the last decade (index funds have really only been popular for the last decade) as US stocks have been in a strong bull market. But history shows that US shares don’t always perform like this.
In the past, there have been long periods where the US market’s underperformed. For example, between mid-2000 and early 2013, the S&P 500 index basically went nowhere.
If the same thing happened again, a global index fund could deliver underwhelming returns. So I think it’s worth taking some steps to diversify a portfolio.
High-quality UK dividend or growth stocks could be worth considering here. Currently, UK stocks only make up around 4% of most global index funds.
Higher returns are possible
The other thing about index funds is that they limit market returns. Typically, these are around 7%-10% a year, on average.
But what if I wanted to achieve higher returns than this? Beating the market’s certainly possible as a retail investor. Unlike professional fund managers – who often fail to beat the market – we can let our winners run without having to trim them to meet the demands of compliance departments.
We can also invest in small growth companies that have tons of potential and are capable of returning five, 10, or 20 times our money.
By buying a few individual stocks to sit alongside a global index tracker, I could potentially generate higher returns and more wealth over time. Let me give an example.
Let’s say I’d put £20,000 into the Vanguard FTSE All-World UCITS ETF five years ago. Today, I’d have a little under £34,000, which is pretty good.
What if I’d put £18,000 into that fund and then bought £1k worth of Apple stock and £1k worth of Nvidia stock? In this scenario, I’d now have about £60,000!
Because over that time period, Nvidia’s share price has soared about 2,500%. That return has turned £1k into around £26k.
Of course, I’m cherry picking the stocks here. Most stocks haven’t performed anywhere near as well as this over the last five years.
But this example shows the power of stock picking. Choose the right stocks and it’s possible to generate incredible returns and turbo-charge wealth.
This post was originally published on Motley Fool
