If you are new to the stock market and are considering investing in a stock market tracker of some kind then it helps to understand the pros and cons before you go ahead.
Generally speaking, at How To Invest In Shares, we are not big fans of stock market trackers but there are some benefits for certain kinds of investors.
To find out what the pros and cons of stock market trackers are and whether they might be right for you, keep reading.
What Is A Stock Market Tracker?
Before we go any further, it’s worth understanding what a stock market tracker is and what it is for.
The purpose of a stock market tracker is to mimic the movement of a given stock market index.
So, for example, a FTSE 100 tracker is supposed to mimic the rise or fall of the FTSE 100.
Hence, if the FTSE 100 rises by 1% on a given day, we want our tracker to rise by 1% too.
In this way, we get to achieve a similar return to the FTSE 100 index without having to hold all the individual shares in the FTSE 100.
Advantages Of Stock Market Trackers
As well as not having to hold lots of different shares, there are several other benefits of trackers too.
The main ones being that they are relatively easy to understand and easy to buy or sell via a stock broker.
So, you don’t need to know how to analyse or pick individual shares.
And there’s no chance of you failing to match the market rate of return by picking the wrong shares.
Trackers are also cheaper to invest in than other kinds of mutual funds because they don’t need fund managers to analyse and pick shares like the more active mutual funds do.
So for those of you who are new to investing and want some exposure to the stock market but don’t want to analyse and pick individual shares for your portfolio, stock market trackers can be very appealing.
All you have to do is to decide which market you want to track and select a tracker fund for that market.
Disadvantages Of Stock Market Trackers
Despite the apparent advantages already outlined, stock market trackers have some disadvantages too, the biggest one being their costs.
When stock market trackers were first introduced, the fees charged by the management companies were very low.
Unfortunately, as the popularity of stock market trackers has increased in recent years, so has their costs, as investment companies providing trackers have got greedy!
So before you buy a stock market tracker, it is worth making sure that you understand the costs of investing in it.
The other major reason that we don’t like trackers at How To Invest In Shares is more technical.
Within any market, at any given time, there are companies doing well and companies doing badly.
If you ignore the short-term fluctuations in share prices, it is fairly straight-forward to select the good businesses with strong growth prospects or recovery prospects, from the bad ones.
Especially if you work as a professional person or business owner because you already have the necessary business smarts to know this stuff.
So why not put your business smarts to good use?
To my mind, I just can’t see the point of investing money into a bad company or one that is performing badly.
Because that’s just stupid!
Essentially, this is what you are doing if you buy a stock market tracker.
You will indiscriminately be investing some of your money into bad companies and thus not investing as much money as you could be into the good companies.
You will also be investing more of your money into the bigger companies within an index and investing less in the smaller companies, because that’s how the index is weighted.
The upshot of all this technical stuff is that you will be damaging your long-term investment returns without even realising it.
Are Stock Market Trackers Right For You?
If you want to invest in the stock market and know that you don’t want to buy individual shares then a simple stock market tracker might be for you.
But if you have some business knowledge already and are looking for stronger long-term returns, then you might prefer to consider building a small portfolio of individual company shares instead.
To find out more about trackers, mutual funds and how to invest in shares, you might want to consider taking a look at my self study program X to 3X in 7: Start Tripling Your Investment Returns In Just 7 Weeks Or Less!
You’ll get detailed guidance and support on how to start investing in shares, just like my previous clients have done.
By the way, a past client generated twice the cost of his investment in his program with the stuff he learned in the very first module!
And that’s nothing compared to the extra money you can make when you finally start managing your own investments.
You can check out the details here.
Alternatively, if that’s too big a leap in one go, then let’s have a chat – I have a few time slots available each month, which you can access here.