Index funds are extremely popular tools for building wealth over the long term. And it’s not hard to see why. Aside from eliminating the need to carefully research individual stocks, almost all aspects of portfolio management are automated.
Index funds offer instant diversification and allow investors to replicate the returns of leading indexes without much effort. But how much money can investors make by harnessing the power of these investment vehicles? And is stock picking still the better strategy despite the increased risk?
Index funds since 2019
Investors have a wide range of indices to follow. Here in the UK, most passive investor capital flows into either the FTSE100 or FTSE250However, there are opportunities to invest internationally, and those who can tolerate some currency risk may choose to follow the US. S&P500.
So if I invested £5,000 in each of these indices in 2019, how much money would I have today?
Starting with the FTSE 100, the index has grown an impressive 32.4% since July 2019, including the impact of dividends. The FTSE 250 hasn’t fared as well, delivering a total return of just 19.1%. But the S&P 500 dwarfs both indices, reaching a whopping 100% over the same period!
In monetary terms, a £5,000 investment in the FTSE 100 would now be worth £6,620, the FTSE 250 £5,955 and the S&P 500 £10,000. That’s quite a wide range of performance, with the latter benefiting in particular from a strong presence in the technology sector.
Is stock selection better?
While the performance of the S&P 500 is undoubtedly impressive, it remains quite lackluster when compared to the performance of individual companies. NVIDIA (NASDAQ: NVDA) as an example. The GPU chip maker has seen its market capitalization increase by a whopping 2,960% over the same period. To put that in perspective, a £5,000 investment in 2019 is worth £153,000 today!
Investors who saw the opportunity five years ago are no doubt excited about it now. Artificial intelligence (AI) has become a ubiquitous technology and demand for the company’s chips has skyrocketed, transforming an already profitable company into a global giant.
Of course, Nvidia is a pretty extraordinary story. There have been many companies in the US and UK that have underperformed, and including such companies in a bespoke portfolio would likely have produced lower returns compared to index funds. Some may even have destroyed wealth.
Stock selection is not a simple process. There are many factors to consider, both company-specific and at a macroeconomic level. This makes it a far more complex process that requires significantly more discipline and effort, which is not for everyone.
But despite the higher risk and volatility, it remains my personal preferred approach to building wealth on the stock market.
The post If I Invested £5,000 in Index Funds 5 Years Ago, Here’s What I’d Have Today appeared first on The Motley Fool UK.
Further reading
Zaven Boyrazian does not own any of the stocks mentioned. The Motley Fool UK has recommended Nvidia. The views expressed on companies mentioned in this article are those of the author and may therefore 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 2024
