Lessons from the FTSE 100 Record

The FTSE 100 reached an all-time high in February, surpassing its previous peak achieved on the eve of the millennium. This illustrates that it can take a long time for the stock market to recover from a crash, but it’s not really representative of an investor’s experience since 1999. People tend to fixate on headline indices, but it’s important to understand that there’s more to a real return than the numbers that make the news. A more realistic measure of the investment return of the UK’s largest listed companies is the total return, which includes the reinvestment of dividends. By that measure, £100 would have fallen in value after the dot.com crash but would have recovered its original £100 value at the end of 2005 and since grown to £168.

The total return is more meaningful than the headline you see in the paper, but it’s still far from representing a diversified investor’s experience over the past 14 years.

Diversifying beyond the FTSE 100 might involve holding small companies that offer important diversification benefits and have a history of performing better than large companies over the long term. During this period, UK small companies more than tripled in value, so an investment in the whole UK market, measured by the FTSE All-Share, would have made the £100 investment grow to £190 over the same period.

On top of that, investing in global markets can improve expected returns and increase diversification; over this period, a global portfolio of shares returned £176 from the initial £100 investment.

The next time you hear that one of the world’s headline indices has risen or fallen, think hard about how meaningful this news is to your broad portfolio of investments.

 

Source: Dimensional Fund Advisors

 

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