If you’re saving for retirement, the fastest way to grow your money is to invest it, and today I’m going to explain the three reasons why I think the FTSE 100 could be the only investment you’ll ever need for your retirement portfolio.
Studies show that over the long term, dividends account for the bulk of investors’ profits and the FTSE 100 is one of the best dividend indexes in the world. At the time of writing this blue-chip index supports a dividend yield of around 4.4%.
The distribution is an aggregation of the dividends paid by stocks in the index, which makes it relatively safe in my opinion. Indeed, for the yield to drop to zero, every single company in the FTSE 100 would have to eliminate their dividends. I think it is highly unlikely this will ever happen.
As well as a 4.4% dividend yield, any investor buying the FTSE 100 today will also get a well-diversified portfolio of 100 stocks operating in different sectors, industries and countries around the world. It would be difficult for the average investor to build a portfolio that is just as well diversified themselves without incurring substantial transaction costs, which would depress long-term returns.
Trying to pick which stocks will succeed over the next five or 10 years is exceptionally difficult and even the experts get it wrong most of the time. If you buy the FTSE 100, you don’t need to worry about this issue. All you need to do is click ‘buy’, sit back and relax because the index will give you exposure to some of the largest companies in the world today.
What’s more, several times a year the index is rebalanced, and struggling businesses are kicked out. To put it another way, the FTSE 100 will give you a managed portfolio of some of the world’s largest companies without you having to put in any extra effort.
3. Low cost
The third and final reason why I believe the FTSE 100 is the best way to save for retirement is cost.
Because the FTSE 100 is one of the world’s leading stock indexes, investors all around the world with hundreds of billions of dollars to invest are looking for exposure. This demand means that fund providers can offer exposure at a relatively low-cost, which is excellent news for average investors such as us.
Today, the cheapest FTSE 100 tracker on the market charges just 0.04% per annum in fees. The impact low fees have on your portfolio over the long term cannot be understated.
Assuming an average annual return of 7%, £10,000 invested for 10 years with an annual management charge of 0.04%, will grow into £19,592 according to my calculations. However, the same investment growing at the same rate over the same time frame would be worth just £17,798 with an annual fee of 1%, that is a difference of £1,794 or 10%.
The bottom line
So overall, based on the reasons outlined above, I believe an investment in the FTSE 100 could be the best way to prepare yourself for retirement.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019