The FTSE 100 celebrated turning 40 yesterday. That’s right, back on 3 January 1984, the index was launched with 100 of the largest companies, weighted by market-cap. The starting price was set at 1,000 points so, logically, you can do some quick maths and know that if I’d invested £1k back then, I’d be in profit. But what are the details?
A tidy profit
Using the current price of 7,688 points, my grand would be worth £7,688. I think that’s one of the easiest conversions I’ve ever had to do!
On the face of it, an almost 8x return is fantastic. Yet I do need to appreciate that this was over the course of four decades. That’s an incredibly long period to keep my money locked up in an investment.
For example, the UK interest rate back in 1984 varied between 8-12%. So naturally I would be expecting a high return from investing in the FTSE 100 if I could get a high risk-free return from sitting on cash.
Comparing the index to specific stocks
Of the stocks that were selected to be in the founding index, 26 are still there today. So another comparison would be to see the results if I’d invested in individual stocks instead over the same period.
Two examples are BAE Systems and RELX. BAE Systems (known as British Aerospace in 1984) started trading at 54p and is now at 1,142p. This is a return of over 21x. RELX (known as Reed International in 1984) started trading at 64p and is now at 3,079p. This is an even higher return of 48x.
From this I can see that investing my £1k in the FTSE 100 as a passive investment wouldn’t have been the best option. Being active and putting the money in specific stocks could have really boosted my profits over the time period.
However, it’s easy to say this with hindsight. Some of the original founding members are no longer public companies. Some of the stocks would have lost me money if I had sold and not held them for this long. My overall risk of buying the FTSE 100 instead of just a couple of shares is lower.
Looking to the next 40 years
Put simply, I don’t expect the FTSE 100 to mirror the gains of the past 40 years in the next 40. The tremendous advancement in technology and globalisation over this period is one that just can’t continue at the same pace.
I believe it’s possible to generate high returns over the decades to come, but not by passively investing in an index. Rather, I think it’ll involve buying specific stocks from areas of the future. This includes renewable energy, artificial intelligence (AI) and FinTech.
It’s still possible to diversify my portfolio to reduce some of the risk. So when I consider the overall risk versus potential reward, it stacks up better than buying a FTSE 100 tracker.
