The FTSE 100 Will Always Beat You

On average, the FTSE 100 (INDEXFTSE:UKX) always beats private investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

stock exchangeEvery investor’s goal is to make money and increase their wealth, or at least protect their wealth. However, the majority of private investors fail to accomplish this simple goal. 

Indeed, it’s often said that many private investors underperform the market, although until recently there have been no definitive figures detailing to what degree investors actually underperform. But now we know, and the numbers are terrifying. 

Lagging the index

Over the past 20 years the FTSE 100 has risen at a rate of around 5.4% per annum, excluding fees, dividends and inflation — dividends received are likely to cancel out fees and inflation anyway. During this period, the market has seen the dotcom bubble and the financial crisis: two events that have sent the FTSE 100 surging to a high of nearly 7,000 and crashing to a low of around 3,000. 

In comparison, over the same 20-year period, according to research conducted by a number of financial institutions, the average investor has only returned 2.5% per annum including dividends. This paltry return is, in a word, shocking.

In fact, the average investor underperformed nearly every financial instrument bar one over the 20-year period studied. The only market that put in a worse performance than the average investor over this period was that Japanese stock market. Some of the instruments that performed better than the average investor over the past 20 years include: cash (3% p.a.), bonds (3% – 8% p.a.), hedge funds (8% p.a.), REITS (10% p.a.) and all emerging markets (6% – 10% p.a.).

All in all, if you include inflation, in real terms over the past 20 years the average investor has returned 0% p.a., while the FTSE 100 has returned over 5%. 

Slow and steady

Many analysts agree that the average investor underperforms the market because they trade too much. As a result, fees eat away at returns and many investors often buy high and sell low, erasing much of their capital in the process. 

So, it seems as if the best way to avoid these dismal returns and rack up a performance that is at least in line with the wider market, investors should look to tracker funds. 

It’s easy to see how a simple tracker fund can transform your portfolio. Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.

And remember, these returns exclude the impact of dividend reinvestment. According to my figures, a £1000 investment in the FTSE All-share, yielding 3% per annum, with capital growth of 5.9% would turn £1,000 into £8,200 over a period of 30 years.

Of course, this is excluding costs, but there are some very low cost trackers out there for you to take advantage of. In particular, BlackRock 100 UK Equity TrackerFidelity Index UK charges 0.09% and the db x-trackers FTSE 100 UCITS ETF (LSE: XUKX) charges a lowly 0.09%.

For the FTSE All-Share, Vanguard FTSE UK Equity Index charges 0.15%, BlackRock UK Equity Tracker offers index replication for 0.16% and the Legal & General Tracker Trust charges 0.16%.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Front view of aircraft in flight.
Growth Shares

Why now is a crucial time for the easyJet share price

Jon Smith takes a closer look at the movements in the easyJet share price and explains what it reveals to…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

Since January, the sizzling NatWest share price has turned £10k into…

The NatWest share price has been red hot in recent years, and Harvey Jones assumes that it has to cool…

Read more »

Typical street lined with terraced houses and parked cars
Growth Shares

Red flag! This FTSE 100 stock looks really overvalued to me

Jon Smith explains why he believes a FTSE 100 stock's overvalued and where he can find better ways to get…

Read more »

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

2 cheap UK dividend shares to consider buying in an ISA today

When I look for dividend shares to hold for the long term, I seek out companies in essential business that…

Read more »

White female supervisor working at an oil rig
Investing Articles

Here’s what £10k invested in Shell shares one year ago is worth today…

Brokers were expecting good things from Shell shares a year ago, Harvey Jones says, so how have things panned out?…

Read more »

Girl buying groceries in the supermarket with her father.
Investing Articles

Q1 results give the Tesco share price a boost, but is it still cheap?

The Tesco share price is back in positive territory year to date after a brief dip, so what does the…

Read more »

Middle aged businesswoman using laptop while working from home
Investing Articles

£10,000 invested in Tesco shares 6 months ago is now worth…

Tesco shares have demonstrated robust growth in recent years. Dr James Fox asked whether the stock could still push higher…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

I bought 3,048 shares in this FTSE 250 high-yielder in 2023. Here’s how much dividend income I’ve had since…

This FTSE 250 investment manager was demoted from the FTSE 100 in 2023 and I bought it for two key…

Read more »