“FTSE’s 15 year losing streak” said the headline – the journalist had done his job, hooked me in to read on – but, dealing with money matters is what I do for a living, so I guess I’m an easier target than most other people.
However, a layperson with little interest in investments, might be forgiven for thinking the headline meant investing in the UK stockmarket would have been a complete disaster over the last 15 years and would have quickly moved on to more interesting news. Go right here.
After all, since the start of the new millennium we’ve had; a tech crash, terrorist atrocities all over the world, conflicts in Afghanistan and the Middle East, a global banking crisis, quantitative easing, government bailouts, IMF bailouts and a number of natural disasters. With all that stuff going on, surely, keeping your cash in the bank and staying clear of risky stockmarket investments would have been a great decision? Well, actually, the answer is a resounding “no”
“…what a lot of people don’t know is that the FTSE 100 index is calculated without taking dividends into
The article was making reference to the fact that the FTSE 100 index ended 1999 at 6,930 and exactly 15 years later it stood at 6,566 – a fall of 5.25% over a 15 year period. Just to keep pace with inflation, you would have needed £100 to grow to about £140, so, to be left with less than £95 would have been pretty pathetic.
However, what a lot of people don’t know is that the FTSE 100 index is calculated without taking dividends into account – the share of profit a company decides to pay in cash to its shareholders. Once this income stream is included, the picture starts to look a little different, in fact, very different. £100 invested in the FTSE 100 since January 2000 and then adjusted to allow for dividends, would have given you back an inflation busting £158. Remember, this assumes that you were pretty unlucky and just happened to invest when the market was at its 15 year peak. If you were lucky enough to stick £100 into the market in March 2009 (possibly after having been in a lengthy queue to make a panic withdrawal from your account with Northern Rock!), it would now be worth £212.
Casting your net across the whole of the UK stockmarket
Now let’s consider what would have happened if you had broadened your investment beyond the FTSE 100 – after all, the index is market weighted, meaning that share prices in larger companies have more impact on the index value than smaller ones. In the case of the FTSE 100; HSBC, Shell, BP and GlaxoSmithKline alone make up over 20% of the index and you will probably be familiar with the term “don’t put all your eggs in the same basket”. By casting your net across the whole of the UK stockmarket, £100 invested in January 2000 would now be worth £179 – an improvement of £21.
But, what if you had avoided the FTSE 100 constituents altogether and instead put your £100 into the FTSE 250 (which picks up the next 250 largest UK companies)? Now we’re cooking on gas – over the 15 year period to the end of 2014, your £100 would have grown to a whopping £379. However, before you start selling the family silver and sticking the proceeds into a portfolio of FTSE 250 companies, remember, when it comes to investing (and most other things in life) there is no free lunch and there is an inextricable link between risk and return – investing in smaller companies is usually riskier than investing in larger companies and the FTSE 250 can give you a rather bumpy investment ride. For example, between November 2007 and October 2008, the FTSE 250 plunged by over 44%!
Taking a more global approach to equity investing
Also, why just focus on the UK? The world is a pretty big place and the UK stockmarket makes up just 8% of global equity markets and 7% of global fixed interest markets. Let’s face it, who wouldn’t want the chance to potentially have some exposure to the next Apple, Microsoft or Intel?
Taking a more global approach to equity investing in 2014 would have been particularly helpful – the FTSE All-Share Index (used to measure the overall UK stockmarket) returned a pretty disappointing 1.18% in 2014. In contrast, the MSCI World Index (a good index for judging global stockmarket returns) produced a return of 11.49%.
At the end of the day, financial journalists have a job to do – creating interesting headlines and stories to help sell their publication. However, it’s important to look beyond the headlines and make good financial decisions based on sound research and advice rather than journalistic sound bites.