Since the 1980s, the average long-term return from the UK’s FTSE 100 blue-chip index is an impressive 8% a year.
After last year’s dip, it has slowed slightly to 6.89%, but that’s still a superior return to cash and bonds. While fascinating, these figures are misleading. They assume the investor gets the average return on the index, say, by investing passively in a FTSE 100 tracker.
There’s nothing wrong with using trackers. I hold a few myself, passively following the FTSE All-Share, S&P 500, and MSCI Emerging Markets indexes.
I pick my own stocks now
Yet, as I’ve become more experienced, I’m trying to beat the FTSE 100 by purchasing individual stocks rather than the whole index. I see several benefits.
When buying a tracker, I have to buy the good shares alongside the bad. For example, I wouldn’t buy shares in either BT Group or Vodafone today. The former has too much debt and the latter may struggle to fund its double-digit high yield. Yet if I bought a tracker, I’d have to invest in both of them.
Similarly, I think house builder Taylor Wimpey looks stronger than Persimmon, so I’ve bought more shares in the former. With a tracker, again, I’d have both.
Picking stocks isn’t an exact science, and I’m no Warren Buffett. BT and Vodafone may defy my low expectations. Persimmon may smash Taylor Wimpey. Yet I still think that over time I can do better by chasing tomorrow’s winners rather than buying the lot, warts and all.
By purchasing individual stocks, I can focus my firepower on particularly attractive opportunities. Lately, I’ve been hoovering up shares in Legal & General Group, which yields a blockbuster 9.5% and trades at just 5.4 times earnings.
There are no guarantees, of course
That’s a lot more tempting than the FTSE 100 as a whole, which yields just 4% and is pricier, valued at closer to 12 times earnings.
Buying individual FTSE 100 stocks also allows me to target specially sectors, such as private equity. I’ve recently topped up my stake in 3i Group, one of the best performing growth stocks on the index. Its shares are up 114.4% over five years and 72.44% over one year. Over the same periods, the FTSE 100 rose 2.22% and 2.81%.
There is no guarantee that any growth stock will continue growing. I had a narrow escape a couple of years ago, when I reversed plans to buy the Scottish Mortgage Investment Trust after deciding it was taking an outsize gamble on US tech generally and Tesla in particular. It fell 50% in 2022 and has struggled this year, too. A loss of that size would have dented my hopes of outperformance.
I won’t always be so lucky. I will spread my risk by investing in at least 15 companies and aim to hold them for a minimum 10 years to overcome short-term volatility.
By concentrating my efforts on stocks like L&G and 3i Group, I’m hoping to up my annual return to 10% or 12% a year. I may not get there, but I’m giving it my best shot.
