In July last year, I began the process of populating my new Self-Invested Personal Pension (SIPP) by purchasing a FTSE All-Share tracker fund.

I’d just transferred three legacy company pensions into my SIPP, with every penny sitting in cash. While I was getting some interest I was keen to put it to work as soon as I could, by investing in shares.

The vast majority of my portfolio is invested in individual stocks, but I wanted to take my time picking them. So I slapped £5,000 into the Vanguard FTSE UK All Share Index Unit Trust without a moment’s hesitation. I could just as easily bought another popular All-Share tracker, for example, SPDR FTSE All Share UCITS ETF (LSE: FTAL). It’s one of the longest established.

Passive income and growth

Tracker funds give me passive exposure to every share on the FTSE 100 and FTSE 250, plus a spread of small-caps too. Better still, they do this at minimal cost, with no upfront fee and low ongoing charges. The SPDR ETF, for example, charges 0.2%. Vanguard’s even cheaper, charging just 0.06%.

I can still remember the days when FTSE trackers charged 1% a year, or sometimes more. That may not sound that much but, over time, the impact’s huge.

Say I invested £5k in a tracker charging 0.06% a year and the index grew at an average of 8% a year, roughly the long-term return on the UK stock market. After 25 years, I’d have £33,770. Yet if the fund charged 1%, I’d have £27,137. That’s a staggering £6,633 less.

The charging difference becomes colossal for largest sums. Let’s say I invested £5,000 every year of that 25-year term. With the low-cost fund I’d have £424,882 after 25 years, the higher cost fund would give me £365,520. Those charges have cost me a scarcely believable £59,362.

Selling my winner

I bought my Vanguard tracker on 7 July last year and got one thing dead right. I love buying cheap shares when markets are down and the index was in the summer doldrums. My £5k investment is now worth £5,875.46, a total return of 17.51% in just over a year.

Over 12 months, the FTSE All-Share’s up 7.7%. I’m ahead for two reasons. First, I bought on a dip. Second, my total return included reinvested dividends. The current yield’s 3.7%.

I’m delighted with that return, but now I have an issue. The vast majority of my SIPP is invested in individual stocks, many of which have smashed the All-Share. Some have done worse, but they’re fewer in number and I’m backing them to recover with style.

This gives me the confidence to believe that I can beat the average FTSE return by individual stock-picking. So I may soon bank the profit on my tracker to raise funds to buy individual stocks. I’ll bid it a fond farewell. It’s done well for me.