The FTSE 100 is down 15% over two decades, so why are investors told to think long-term? SIMON LAMBERT on the dividend case for the defence
Can you defend the UK stock market’s dire performance since the turn of the millennium? Dividends are the key to that
The FTSE 100 has gone nowhere in 20 years, so why are investors told to think long-term?
That is the kind of question that those of us who advocate investing in the stock market as the best way to grow your wealth deserve to face.
It’s been a brutal fortnight-and-a-half for investors and the UK’s leading stock market index closed down again yesterday, against a backdrop of the Bank of England’s emergency interest rate cut to 0.25 per cent and Rishi Sunak’s coronavirus-battling Budget.
As I wrote this column, the FTSE 100 had just closed at 5,865 – down 23.6 per cent on its recent high in mid-January.
More importantly though, that is 15 per cent below the 6,930 dot com boom peak on New Year’s Eve in 1999.
You can see why people dubious about the merits of risking money investing could claim the stock market has trod water for two decades, albeit they’d be slightly wrong because the Footsie’s fallen a fair bit.
But there is a case for the defence and it hinges on dividends.
There is a fundamental flaw with the way that the stock market is measured by the index of the UK’s biggest firms, the FTSE 100, and its cousins, the mid-range FTSE 250 and broader FTSE All-Share.
All of them put forward an index based on companies’ share prices, but that’s not what delivers long-term investment returns.
What is far more important is the overall reward you get from holding shares and a big chunk of that comes from dividend payouts compounded.
To measure that you need a total return index – and while FTSE compiles these for its main indices, they are not widely-published, despite the fact that you’d think it would definitely be in the London Stock Exchange or investment platforms’ interests to do so.
What a difference a dividend makes: This chart shows the standard FTSE 100 index (grey) since 1986 compared to the FTSE 100 total return index (red) over the same period
Take the FTSE 100 Total Return index figures and the picture over the past 20 years looks very different.
Earlier this week, I asked Russ Mould, of AJ Bell, to pull the figures for This is Money, so I could do the comparison.
On 31 December 1999, the FTSE 100 stood at 6,930, whereas when the stock market closed on Monday after its bumper 7.7 per cent one-day fall it was at 5,966 – a 14 per cent decline.
In contrast, on 31 December 1999, the FTSE 100 Total Return index stood at 12,447, whereas it closed on Monday at 22,114 – a 77 per cent rise.
Over 20 years, that is a 2.86 per cent average annual return, which in all honesty is pretty poor for two decades of investing.
It’s only about 2 per cent higher than inflation, which has been 75 per cent since the start of 2000, but you are likely to have struggled to match that with cash savings.
And, on the bright side, a 77 per cent return is considerably better than a 14 per cent loss.
It is also very important to note that if you’ve spent the last 20 years only investing in something that tracks the FTSE 100 then you are doing it wrong.
Investments should be far more diversified than just the UK’s top 100 companies, or even the broader FTSE All-Share basket that includes much more of Britain’s stock-market listed firms.
Ideally, you start at the position of owning the world, by investing in a fund, trust, or tracker than invests in companies around the planet – and then if you want a bit more UK exposure you add a small dollop in.
Those who invested in a global fund would have seen a much better return over the past 20 years than even the total return versions of the FTSE 100 or All-Share would have offered.
If you want to reassure yourself as you nervously watch stock markets plunge into the red, it’s worth remembering the total returns from this instead of dwelling on one misleading stock market index.