Investing can be overly complex at times, especially if you’re a beginner. There are so many different strategies out there that figuring out what you should do can be unnecessarily difficult. Most people simply know they need to be investing for their future but don’t want to spend hours every day looking at stock charts.
The way I do this is by investing in broad index funds that are low-cost, high quality and diversified globally. Over time, I believe that the broad market will rise and I want to be invested in it. The chart below shows you the S&P 500 from 1928 to 2023. In that time frame the index has increased in value by 244x. In the past 30 years, it has increased almost 10x.
While some people may do extremely well picking individual stocks many others lose everything. Investing in broad-market index funds allows you to be well-diversified and capitalise on a rising market.
As a UK investor, I have a large portion of my portfolio in a single global index fund. For many people, I believe it would serve them well as a one-fund portfolio in their earlier investing years and eventually add a second holding of bonds as they approach retirement.
The fund I’m referring to is the Fidelity World Index Fund. Let’s jump in and take a look at what this fund has to offer.
Is This Fund All UK Investors Need
What Is An Index Fund?
An Index fund is a pre-made portfolio constructed to track a financial market index, such as the S&P 500 or the FTSE 100. Index funds provide you with broad market exposure and low operating expenses. No matter the state of the market, these funds track the index. There is no active management happening in the background like there is with an active fund. This allows the fund to offer much cheaper fees.
My Requirements For A Global Index Fund
When I was deciding what global Index Fund I would invest in, I had a set of parameters I wanted to meet:
Global Diversification – Weighted Predominantly Towards The US
Some people only invest in the UK, others in the United States but I want diversification across the globe with a heavy weighting towards the US. Most of the growth in the past decade has come out of the United States, especially in the tech sector.
I believe this is going to continue especially with AI and the massive impact it will have. If you look at the FTSE 100, it has virtually no exposure to tech.
I also want some exposure to Europe and other developed markets. As the saying goes, don’t put all your eggs in one basket. Certain periods will see some economies perform better than others. Having exposure to them helps to limit the volatility in your portfolio slightly.
Index Funds have significantly lower fees than active funds. Most Index Funds have fees somewhere between 0.06% and 0.30% in the UK. If you invest in mutual funds through a financial advisor, you may be looking at fees upwards of 2% annually.
Just take a look at the chart below. This is how much a 2% yearly fee can impact your returns over long periods of time. It’s huge. The chart shows how a £10,000 investment performed with a 0.07% fee and a 2% fee from 1983 to 2023. The Index fund with low fees returned over double what the same investment with a 2% fee returned.
This is why it’s important to be vigilant of fees when investing. Low-fee index funds help to protect your long-term returns.
Long Track Record Of Success
I also want to ensure that the Index Fund I am investing in is managed by a reliable company with a long track record of success.
Best Global Index Fund For A One Fund Portfolio – Fidelity Index World Fund
My index fund of choice is the Fidelity Index World Fund. This fund aims to track the performance of the MSCI World (Net Total Return) Index. The Index is made up of 1510 large and mid-cap companies across 23 developed markets.
The fund is managed by Fidelity who have been in business for over 70 years and the fund itself was constructed back in 2014 so it’s been around for almost 10 years. This gives us a good track record to look at.
In terms of fees, it has an ongoing charge of 0.12% annually which isn’t the cheapest of all index funds out there but compared to others that offer global diversification, it’s one of the best options.
The portfolio consists of 97.76% stock, 0.04% bonds and 2.14% cash at the time I’m writing this article. Most brokers or robo-advisors would classify this as a risky/aggressive investing strategy. However, over the long term, equities significantly outperform other asset classes.
If I were 5-10 years away from retirement, I would consider rebalancing the portfolio somewhat to make it more conservative. The closer you are to retirement the less time you have to recover from large losses.
I’m currently 26 so can deal with the market dropping in the short term, if I outperform over the long term.
In terms of geographical regions, almost 69% is invested in the United States, 9% in the Eurozone, 6% in Japan, 5% in Europe exc Euro, 4% in the UK and some in Canada, Australasia and Developed Asia.
I’m happy with the high weighting towards America. If you look at the past returns of the UK FTSE 100 vs the S&P 500 the US significantly outperforms the UK. In the past couple of decades, a large reason for this is growth in big tech.
The FTSE 100 basically contains no technology companies. Major big tech players operate and list on United States stock exchanges. Personally, I believe tech will continue to perform well over the next decade as AI rapidly improves. I don’t know which companies will benefit but I bet in 10 years they’re sitting in the S&P 500. Having a large portion of my portfolio aimed at the United States gives me exposure to this as well as many other markets for diversification.
You also benefit from the 30% exposure elsewhere in the world, mainly Europe and the UK with a slight portion of Asia.
Over time different countries will perform well in different periods. While one is doing well, others will do poorly and vice versa. Because of this, you tend to get less volatile growth with a global index fund such as this one compared to the S&P 500 by itself.
In terms of sectors, the Fidelity Index World Fund has 3.9% Basic Materials, 10.7% consumer cyclical, 14.5% financial Services, 2.37% Real Estate, 7.34% Comm Services, 5.32% Energy, 10.65% Industrials, 22.55% Technology, 7.13% Consumer Defensive, 12.95% Healthcare and 2.54% Utilities.
The portfolio is fairly well diversified across multiple different sectors. The top holdings in this portfolio essentially mimic the top 10 holdings in the S&P 500.
We have all the big names you would expect to see there, Apple, Microsoft, Amazon, Nvidia, Alphabet, Tesla, Meta, Exxon and United Health Group. These top 10 holdings make up 19.59% of the portfolio.
As you can see the top 10 holdings are also tech-heavy as those are some of the largest companies in the Index. 10 companies out of 1510 make up 20% of the holdings.
Past performance does not indicate future results but I do think it’s worthwhile to take a look at the historical performance of this Index Fund vs the S&P 500 and the FTSE 100. All funds have dividends automatically re-invested.
The S&P 500 has outperformed both the Fidelity World Index and the FTSE 100 over the past 8 years. So you may be wondering why would you invest in the world fund instead of simply investing in the S&P 500.
Well, investing in the Index World Fund allows me to diversify my holdings. Over the past 8 years, the US has performed extremely well. The Fidelity World Index has also benefited from this but its international holdings have held back the returns slightly.
At some stage, I suspect that Europe and Asia will perform well, while the United States will underperform. Having an international allocation allows me to decrease the volatility in the portfolio. While the highs might not be just as high the lows also won’t be as low. This allows for steady stable growth over time.
How To Buy The Fidelity Index World Fund
The Fidelity Index World Fund is available on most popular brokerages as well as directly from Fidelity themselves. However, some of the newer brokerages such as Trading 212 don’t currently offer this Index Fund. Personally, I use Hargreaves Lansdown to purchase my units in this fund.
Hargreaves Lansdown is one of the most trusted investment platforms in the UK. They offer amazing customer service with access to someone on the phone at any time. However, these come at a high price in terms of fees.
- Amazing customer service
- Reliable trustworthy brand name
- High fees on stock trading & ETFs
- Less Modern interface than competitors
That right there is why I think the Fidelity Index World Fund makes for a great one-fund portfolio for UK Investors. If you want global diversification, low fees and a reputable fund I think this Index fund has it all. If there’s a fund out there that you think is better, let me know in the comments and I will check it out.
Read More From Money Sprout: