A lump sum investment in the FTSE 100 looks set to deliver a tasty return this year. Up 18.3% year date, a £5,000 stake on 1 January would now be worth £5,915.
Can the Footsie repeat the trick in 2026, though? Fresh interest rate cuts, strong commodities prices, and sustained demand for cheap shares could keep powering UK blue-chip shares higher.
Yet I’m not tempted to buy a FTSE 100 index fund for next year. Want to know what I’m doing instead?
Thinking long term
Guessing the short-term direction of individual share prices or tracker funds is a tough business. Even the most experienced fund managers and market commentators can end up looking silly.
Few predicted a near-20% rise in the FTSE 100 at the start of the year. At any one time there are a host of competing factors pulling the index one way or another. There’s also the chance of sudden, unforeseen events that can drive share indexes higher or cause them to come crashing down.
This is why taking a long-term approach is so important. This way, the highs and lows of the market tend to balance out, giving investors a smoother path to growth.
Those who target returns from short-term movements are taking unacceptable risk in my view. Holding quality shares, trusts and funds for an extended period (five years or more) allows their fundamentals to shine through over time, driving long-term growth. It also removes the impact of market volatility than can unsettle even high-power stocks.
Here’s what I’m doing
I personally buy stocks with a view to holding them for a decade. Warren Buffett‘s view that “if you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes” greatly influences my investing strategy.
But I’m not thinking about buying a fund that tracks the FTSE index. I’m targeting individual shares, which — while more susceptible to short-term volatility — often deliver superior long-term returns.
I’ve bought a number of quality blue-chips to my portfolio this year like Aviva, HSBC and Games Workshop. The next one I’m considering is BAE Systems (LSE:BA.).
Since 2015, it’s delivered an average annual return of 14.6%, better than the broader FTSE 100’s 8.4%. Can it keep outperforming though?
A FTSE success story
My prediction would be an emphatic yes. Geopolitical instability is growing, and weapons manufacturers like BAE Systems are witnessing unprecedented demand by modern standards.
Sector competition is high, but the FTSE firm’s robust relationships with major governments helps limit this threat. It booked a whopping £27bn worth of orders between 1 January and 12 November, latest financials showed.
I’m confident sales should continue streaming in as NATO nations accelerate their spending plans. Under its current strategy, total spending by the defence bloc will surge to $4.2trn by 2035.
Supply chain problems remain an issue that could push up costs and impact project delivery. But on balance, the outlook here is extremely encouraging in my view.
I think BAE’s profits (and share price) will surge over the next decade, making it one of the FTSE 100’s star performers.
