Is this the best way to make £1 million for your retirement savings?
Most people would love to retire on £1m. It is enough to enjoy a financially free retirement, and for many people is a much more realistic prospect than they may imagine.
Certainly, there are a variety of methods and strategies which could be employed to reach a retirement savings figure of £1m. However, for many people it is difficult to find a method that offers a mix of reward, limited risk and efficiency.
All too often, a strategy of investing in shares means a time commitment which is not possible for many working people. And with high returns usually meaning high risks, it can be difficult to adopt a solid strategy which delivers on an individual's retirement goals.
Perhaps the most underrated method of generating a large nest egg for retirement is investing in a tracker fund. In recent years they have become increasingly attractive due in part to their lower costs. It is now possible to access a FTSE 100 or FTSE 250 tracker fund and pay less than 0.3% per annum in charges. This means that the return for an investor almost matches the return of the index in question, with tracking error usually being relatively low over the long term.
As well as a low cost, the benefit of a tracker fund is diversification. Investing in a FTSE 100 tracker fund means that an investor has exposure to 100 different stocks, which reduces company-specific risk to a relatively low level. Of course, market risk remains, and stock markets do endure periods of volatility. But in the long term, the odds are stacked in an investor's favour, since both the FTSE 100 and FTSE 250 have always come back from any bear markets that they have experienced. In other words, holding them for the long term has always yielded capital gains for investors no matter when they invested.
While investing in a tracker fund may seem like an overly simple method, the returns on offer can be exceptional. For example, the FTSE 250 has recorded an annual total return of almost 10% over the last 20 years. Many investors, both professional and private, would struggle to beat such a return over a long time period. Therefore, in many cases, a tracker fund may offer superior returns to those that can be achieved through stock picking.
Furthermore, investing in a tracker fund could be a good idea for investors who are time-poor. Once set up, it is possible to fully automate the process of buying units in a tracker fund, and so it would require minimal ongoing work on the part of the investor.
Of course, for investors who are able to take the time to find the better opportunities in the FTSE 100 and FTSE 250, buying shares in companies rather than units in a tracker fund could be a sound move. Doing so could lead to superior performance, as well as the potential to tailor a portfolio towards dividends or growth specifically.
But for investors who want to capitalise on the growth potential of the stock market and have very little time to do so, a FTSE 250 tracker fund seems to be a sound means of making £1m.
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