The end of the tax year is fast approaching and if youve not used up your enlarged ISA allowance of 15,240 then now is the time to capitalise on this tax-free wrapper.
However, with the market trading at record highs, Im worried about a possible correction. So, rather thantrying to second-guess the market, and pick stocks, Im going to buy the market as a whole. In the words of John Bogle, founder of Vanguard and index fund pioneer:Dont look for the needle in the haystack. Just buy the haystack!
Using an index fund to track the performance of the FTSE 100 has become an extremely popular way of investing over the past few years. This method of investing has even been advocated by the Oracle of Omaha, Warren Buffett, as its often the case that active asset managers fail to provide value for money. Last year, within his annual letter toBerkshire Hathawayshareholders, Warren Buffett gave us a glimpse into his retirement plan.
Actually, it was not advice for his retirement but rather advice forthe trustee whose duty it will be to administer the money Buffett is leaving for his wife the majority of Buffetts wealth will go to charity.Heres Buffetts advice:
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.
The logic behind this statement is simple.Over the past 20 years, the FTSE 100 has risen at a rate of around 5.4% per annum, excluding fees, dividends and inflation dividends received are likely to cancel out fees and inflation anyway.
Further, the FTSE 250 has racked up annual returns of around 11% for the past 10years. Over this period the market has negotiated one of the worst financial crises in history.
In comparison, over the same 20-year period, according to research conducted by a number of financial institutions, the average investor has only returned 2.5% per annum including dividends.
The best method
So overall, the figures show that if you want to achieve the best rate of return for your money, tracking the index is the way to go. And when you consider the paltry rate of interest offered by most cash ISA providers, the FTSE 100s average dividend yield of 3.5% is extremely attractive.The FTSE 250s yield stands at 2.5%.
This is why Im buying a low-cost FTSE 100 and FTSE 250 tracker for my ISA. Granted, the funds wont make me the next Warren Buffett but they provide a low-risk, effortless way of achieving above-average returns!
Up to you
Of course, how you decide to build your ISA portfolio is entirely up to you.However, if you don’t find this advice useful then there are plenty of other ways to build a retirement portfolio that won’t let you down.And you can’t go wrong with a portfolio of defensive stocks.
To help, The Motley Fool’s top analysts have put together this free report entitled,“5 Shares You Can Retire On”. All five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends.
Do NOT buy these 3 stocks
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