It must be 20 years since I first read the famous Barclays Equity-Gilt study, which shows that investing in shares has consistently beaten all other kinds of investment over long periods. And it looked like that really was happening, although confidence did take a hit from the dot com boom and bust at the turn of the century — but that was just a one-off, right?
A disastrous decade?
Well, no, because we had another one-off a few years later with the banking crisis, and then we had eurozone woes and the Grexit panic in Greece (oh, how long ago that seems now), Chinese growth slowing, the oil price slump…
The net result is that, at only around the 7,000 point level today, the FTSE 100 has put on a pathetic 13% in the past 10 years. At an annual growth rate of 6% since December 2006, which would be close to the FTSE 100’s actual growth since inception, we’d be looking at 11,000 points today — never mind 8,000.
So is it all over for stock market investing? The short answer is no and I’ll tell you why.
Firstly, that 13% is the return you’d have got only if you’d invested all your cash on a single day back in 2006, and not a penny more since. In reality, investors who regularly save their spare pennies and buy shares will have mopped up some very cheap bargains during each of the slumps we’ve been through, and that will have boosted their returns very nicely.
Also, the headline return ignores the effect of dividends, which would have added an extra 30% or more over 10 years — and even more if the dividend cash had been invested in buying more shares.
Actually pretty good
Overall, had you spread out your investments and reinvested your dividends, I reckon you’d be close to having doubled your money in 10 years — and if that’s what investing in shares can do even during a so-called lost decade, think how much better you can do when there’s a bull market on.
The question is, will 2017 bring a return to rising share prices and will another 1,000 point barrier be surpassed? The signs make me think we could see exactly that.
For one thing, the falling value of the pound has given the FTSE a one-off boost, as the fundamental valuation of companies is effectively based on the worldwide currency that is the US dollar. There’s also a growing feeling that perhaps the UK’s departure from the EU won’t be so bad for all those companies listed on the London Stock Exchange after all — as a famous old lady once suggested, markets have a habit of bucking politics.
Top quality companies
The bulk of the companies on the FTSE 100 are global in their reach, and the UK is but one part of their markets — Royal Dutch Shell, HSBC Holdings, BP, British American Tobacco and GlaxoSmithKline are the five biggest by market cap at the time of writing, and not one of those should really give a hoot about Brexit.
And you can say a lot about the choice of Donald Trump for US president, but most observers expect his administration to be more business friendly — and since the election, both the Dow Jones and NASDAQ have spiked upwards.
So will the FTSE 100 reach 8,000 in 2017? I wouldn’t bet against it.
