2020’s here! But how did UK FTSE 100 shares perform in 2019?

The FTSE 100s performance in 2019 showed just how important it is to diversify your investments, writes Thomas Carr.

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.

It’s that time of year when we look back and reflect on the year that’s just gone. From a UK stock market perspective, despite all the negative headlines and geopolitical drama, 2019 turned out to be a pretty good year for investors.

Solid gains for the FTSE 100

The FTSE 100 rose by 12% over the course of the year, largely thanks to a late post-election rally in December, when the main index rose by 5% in less than four weeks. That said, the FTSE 100 still finished the year slightly below its peak, which came back in July.

The FTSE 100 is weighted towards the companies that have the highest market capitalisations. It’s also rebased at various times of the year, which involves the promotion and demotion of companies into and out of the index. In theory, this method should ensure that the FTSE 100 performs better than it otherwise would do, since falling stocks are removed and rising stocks are added.

Investing the same amount in all 100 stocks, that made up the FTSE 100 at the start of the year, would have generated a return of 18% (without dividends). Therefore, removing any weighting towards the biggest stocks would have beaten the market by 6 percentage points, supporting the idea that cheaper, smaller companies provide the greatest returns.

This average return is the one we would be most likely to get if we just picked a stock at random – which is not what I’m recommending. A median return of 19% shows that this average is not skewed by a few out-performers.

Some 76% of FTSE 100 constituents gained in value, while 61% managed to beat the FTSE 100s gain of 12%. This means that 24% lost value, with the average loss being 14%.

Meanwhile, half of the constituents registered gains of over 20%, with 15% returning more than 40%. At the other end of the spectrum, just 16% of stocks lost more than 10% during the year.

So what does this mean for investors?

On the face of it, this looks like it would be better to only invest in a few stocks to achieve higher returns. While it’s true that achieving a higher than average return is more likely when investing in a few stocks, it’s also more likely that a lower than average return will be achieved. Simply put, increasing the number of stocks – in other words diversifying – reduces investment risk.

To explain this further, if we invested equal amounts in four FTSE 100 companies at the start of the year, there would be a six percent chance that all stocks would have lost value. However, investing in all constituents would have reduced this chance to zero. Likewise, picking just one stock at random, would have had an almost 1-in-4 chance of losing value.

Personally, I am not comfortable taking on this amount of investment risk, which is why I make sure to diversify my holdings through the number of stocks that I invest in. But for best results, I’m not recommending that we all just buy index trackers. I believe that by researching individual stocks, we can identify those that are more likely to outperform the market and weed out the ones that are least likely to do well.

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.

Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

At 231p, is there value in the Legal & General share price? Here’s what the charts say!

Here, this Fool delves deeper into Legal & General to see if its current share price is the bargain it…

Read more »

Investing Articles

3 diverse FTSE stocks I’d consider buying to invest in Asia

This trio of FTSE shares could be the perfect way to invest in the fast-growing economies of Asia over the…

Read more »

many happy international football fans watching tv
Investing Articles

6.4% yield! Is ITV a dividend stock to consider buying during the Euros?

Our writer takes a look at ITV and assesses whether the FTSE 250 dividend stock might be a good fit…

Read more »

Illustration of flames over a black background
Investing Articles

Up 915% in a decade! This growth monster may also be the best FTSE income stock of the lot

Harvey Jones has been watching this top FTSE 100 growth and income stock for months and now he's found another…

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Will FTSE 100 shares soar 35% after the general election?

Royston Wild explains why FTSE 100 shares might be about to soar, and discusses a top penny stock that could…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After gaining 34% in a month, is the Nvidia share price now uninvestable?

Our author says the Nvidia share price is very high at the moment. He's cautious when considering investing in the…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

This under-the-radar FTSE 100 share has hiked dividends 13.7% a year for a decade. Time to buy?

Harvey Jones is kicking himself for missing out on this FTSE 100 share that's kept investors happy with long-term share…

Read more »