The FTSE 100 is the UK’s dominant stock market index. As a result, a lot of British investors have money invested in FTSE 100 tracker funds.
Has the Footsie actually been a good investment lately though? Let’s take a look at how much I’d have today if I had invested £5,000 in an index tracker fund half a decade ago.
Accumulation investment
I’m going to base my calculations on the performance of the Vanguard FTSE 100 Index Unit Trust, which is available on platforms such as Hargreaves Lansdown and AJ Bell Youinvest. This is a relatively popular Footsie tracker. I’m focusing on the ‘accumulation’ version, which reinvests all dividend income.
According to Hargreaves Lansdown, this tracker fund delivered a total return of 10.6% for the five years to 11 October. That equates to a return of about 2% per year, although the return over the last year was about -0.6%. This means that if I had invested £5,000 in the fund five years ago, I’d now have about £5,530.
Is that a decent return over five years? Not really, if I’m honest.
Of course, it’s probably a better return than I would have generated if I’d left my money sitting in a bank account earning interest. For most of the last five years, it has been hard to find bank accounts paying more than 1% to 1.5%.
However, it’s often said that shares return 7% to 10% per year over the long term and this return is well below that. If I was relying on a FTSE 100 tracker fund to grow my wealth for retirement, I’d be disappointed. When I originally invested my capital, I would have expected to have more money at the end of the five-year period.
Underwhelming returns
It’s worth noting that there are plenty of investments that would have delivered much higher returns over that timescale.
For example, had I invested £5,000 in the Vanguard FTSE Global All Cap Index – which offers global stock market exposure – I’d now have about £7,170.
If I’d invested £5k in the Vanguard US 500 Stock Index – which tracks the S&P 500 – I’d now have about £8,850.
And if I’d invested £5k in Fundsmith Equity – a very popular actively-managed fund – I’d now have about £8,000.
Or, had I put that £5,000 into Apple shares, I’d now have around £22,000 (investing in a single company instead of a fund would have been a much riskier approach, of course).
Looking at these returns, the performance of a FTSE 100 tracker has been quite underwhelming.
My takeaway
If there’s one takeaway from this analysis, it’s that diversification is crucial when investing in the stock market. Even when investing in index funds.
By building a fully diversified portfolio that has exposure to different countries, different sectors, and stocks of different sizes, investors can dramatically improve their chances of generating strong returns from the stock market.
This is certainly what I’m doing. In recent years, I’ve put together a portfolio that provides exposure to top companies listed in the UK, the US, Europe, and Asia. My portfolio is a mix of actively-managed funds, tracker funds, and individual stocks like Apple.
I’m confident that in the long run, this diversified approach to investing will pay off.
