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Should investors buy a FTSE 100 index tracker or pick stocks in this volatile market?

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Image source: Getty Images

The FTSE 100 index has done well over the long term. It started at the level of 1,000 on 3 January 1984. And despite volatility in 2022, it didn’t drop as low as 6,800 during the year.

It’s clear the capital returns from the index have been worth having over the period. But investors could have done much better by reinvesting dividends along the way. The Footsie tends to be the best-paying UK index when it comes to dividends. And, as I write, the yield is just below 4%. But it’s been higher on occasions.

Meanwhile, tracker funds first arrived in the UK during the 1980s. And these days they’re popular vehicles for investors to allocate capital to stocks and shares with a passive approach. Buy-and-forget, if you like. And it’s a great idea.

My passive strategy

My own passive strategy involves putting regular money every month into a range of index tracker funds — including one that follows the FTSE 100. And because I’m in the building stage of my portfolio’s development, I’ve chosen trackers that automatically reinvest dividend income along the way.

For that part of my investment pot, there’s nothing to do but keep on investing. So I can get on with my life, my work, and everything else without giving a thought to the ups and downs of the market. When bear markets, setbacks and reversals happen, my regular investments keep going in. And those purchases when the market is down could be storing up greater potential returns for me when the market recovers.

The important thing to focus on is the long-term potential of the stock market. Although there are no guarantees that past performance will repeat in the future. However, the passive, index-tracking part of my portfolio will broadly match the performance of the market. And that’s attractive to me, considering the little amount of work needed from me.

Active investing

However, picking individual stocks can be an attractive option for investors. And the main reason is the strategy can expose a portfolio to the potential for higher gains. But stock-picking comes at the price of being an active strategy. And that requires work and dedication from investors.

Indeed, running an active investment strategy is not for everyone. Some investors won’t have the time or desire to do so. But others will enjoy running an active portfolio and making their own buy and sell decisions.

I’m shooting for higher gains myself by investing in the shares of individual companies alongside my passive tracker investments. But there’s no guarantee of success even if I adopt a long-term perspective. All companies can run into operational problems from time to time.

Nevertheless, the idea of self-directing my investments appeals to me. And my belief is that the current market is presenting investors with some attractive stock opportunities. But if I didn’t have the time or inclination to invest actively, I’d consider managed funds alongside my trackers.

The post Should investors buy a FTSE 100 index tracker or pick stocks in this volatile market? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares 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 2022