Is a global index fund all I need for my ISA and SIPP?

Many financial experts and influencers today say that the only investment needed is a simple global index tracker fund, like the Vanguard FTSE All-World UCITS ETF (LSE: VWRP). Buy this type of fund for your Stocks and Shares ISA or SIPP and you’ll get an average market return and be set for life, they say.

But is this really true? Let’s discuss.

Lots to love

I’m a big fan of global index funds and I own a few in my various investment accounts. These products give me exposure to stocks in multiple countries, and to all the big names like Apple, AmazonAnd Tesla.

Meanwhile, running costs are very low. Overall, there’s a lot to like.

No miracle cure

That said, I’m not 100% convinced that these products are a ‘one-stop shop’ when it comes to wealth generation. You see, these funds are not as diversified as many think. For example, the Vanguard FTSE All-World UCITS ETF currently has approximately 65% ​​exposure to the US stock market.

This has worked well over the past decade (index funds have actually only been popular in the last decade), as US stocks have been in a strong bull market. But history shows that US stocks don’t always perform that way.

In the past, there have been long periods of underperformance in the US market. Between mid-2000 and early 2013, the S&P500 index actually went nowhere.

If the same thing were to happen again, a global index fund could deliver disappointing returns. So I think it’s worth taking some steps to diversify a portfolio.

High-quality UK dividend or growth stocks may be worth considering here. Currently, UK shares only make up around 4% of most global index funds.

Higher returns are possible

The other thing about index funds is that they limit market returns. Normally these average around 7%-10% per year.

But what if I want to get a higher return than this? As a private investor it is certainly possible to beat the market. Unlike professional fund managers – who often fail to beat the market – we can let our winners run wild without having to trim them to meet the demands of compliance departments.

We can also invest in small growth companies that have a lot of potential and can return five, ten or twenty times our money.

By buying a few individual shares and placing them next to a global index trackerI could potentially generate higher returns and more wealth over time. Let me give an example.

Let’s say five years ago I put £20,000 into the Vanguard FTSE All-World UCITS ETF. Today I would have just under £34,000, which is pretty good.

What if I put £18,000 into that fund and then bought £1,000 worth of Apple shares and £1,000 worth of Apple shares? Nvidia stock? In this scenario I would now have around £60,000!

Because during that period, Nvidia’s stock price increased by about 2,500%. That return turned £1,000 into around £26,000.

Of course I choose the shares here. Most stocks haven’t performed nearly as well over the past five years.

But this example shows the power of stock selection. Choose the right stocks and it is possible to generate incredible returns and enormous wealth.