The FTSE 100 is the UK’s flagship index, originally created in 1984 by the FTSE Group, which continues to maintain it today. It’s a collection of the largest 100 companies by market capitalisation that are publicly listed on the London Stock Exchange. And it’s arguably one of the most popular performance benchmarks used by British investors when judging the returns of an investment portfolio.
For passive investors, it’s also a popular index to replicate through tracker funds or exchange-traded funds. But what sort of returns can an individual investor hope to expect?
Average returns of the FTSE 100 over time
When calculating the FTSE 100 average return, it’s not just a case of seeing where the price level has moved in the past. That’s because many of its constituents pay dividends, which also contribute to the index’s overall total return.
Combining the income from dividends and the price level movement yields the total shareholder return (TSR).
The TSR is a truer reflection of the gains investors have made by tracking the FTSE 100 over time. But what is the average TSR offered by the index?
The level of the FTSE 100 is driven by fluctuations in the stock prices of its constituents. Therefore, it’s constantly in a state of flux, changing on a daily basis. However, looking throughout history, the performance has varied dramatically depending on the time frame used.
|FTSE 100 Returns1||Past Year||Past 5 Years||Past 10 Years||Past 20 Years|
|Total Shareholder Return||5.43%||20.30%||83.36%||278.89%|
|Average Annualised Return||5.43%||3.77%||12.89%||6.89%|
Data from November 2022. Total Shareholder Return calculated from index level movement + average dividend yield.
When was the lowest return of the FTSE 100?
Despite consisting of the largest publicly traded companies listed on the London Stock Exchange, the FTSE 100 hasn’t been immune to volatility. In fact, there have been multiple periods over the last two decades where the stock index has tumbled by double digits.
The largest single-year decline seen since the turn of the millennium was in 2002. Even after considering dividends, the FTSE 100 tumbled by more than 20%. That came on the back of the dot com technology bubble. Similarly, during the 2008 financial crisis, the index fell by 24.7%.
When was the highest return of the FTSE 100?
Analysts often spout that stock market crashes and corrections create the best buying opportunities for investors. And looking at the historical performance of the FTSE 100, there certainly seems to be plenty of evidence supporting that statement.
That’s because nearly all of its best-performing years directly followed a period of downward volatility.
|Dot Com Bubble||Year Following Dot Com Bubble||Financial Crisis||Year Following Financial Crisis||Covid Crash||Year Following Covid Crash|
|FTSE 100 TSR||-20.09%||+15.99%||-24.66%||+24.88%||-9.46%||+17.38%|
How do the returns of the FTSE 100 compare to the returns of the FTSE 250?
Another popular UK index used as a stock market benchmark is the FTSE 250. The stock index is home to the 101st to 350th largest companies on the London Stock Exchange, in order of market capitalisation. As such, many of its constituents are significantly smaller than the businesses found within the FTSE 100.
Smaller companies typically have less access to external resources, making them more susceptible to external disruption. That’s why small-cap stocks are notorious for being volatile. This principle is taken to the extreme when looking at penny stocks.
Having said that, smaller businesses often have further room to grow. In other words, while investors tracking the FTSE 250 are exposed to higher risk levels, the potential returns are also higher. And looking at its historical performance compared to the more stable FTSE 100 illustrates this trend perfectly.
|FTSE 100 TSR||10.0%||17.4%||1.0%||-3.3%||21.8%||10.3%||-7.9%||17.8%||-9.5%||17.4%|
|FTSE 250 TSR2||26.1%||32.3%||3.7%||11.2%||6.7%||17.8%||-13.3%||28.9%||-4.6%||16.9%|
How should UK investors use annual return data?
Historical annual returns of leading indexes can give good insights into the stock market’s overall performance in any given year.
As seen in the previous tables, the annual returns of both the FTSE 100 and FTSE 250 have been quite volatile. That’s why past performance is often a poor indicator of future results.
While the FTSE 100 average return has historically trended between 6% and 8% over long periods, there is no guarantee that it will continue delivering this level of shareholder returns in the future.
So, what value does the average return of the FTSE 100 or FTSE 250 provide investors? The average performance primarily serves as a benchmark. Investors picking individual stocks and building custom-tailored investment portfolios need a method of comparing their returns to the stock market.
Suppose an investor cannot outperform or even match the performance of these flagship indexes. That might indicate that stock picking may not be a suitable investment strategy for that individual. Investing through a low-cost index fund may be a better path to building long-term wealth in this scenario.
Alternatively, if an investor consistently outperforms the benchmark indexes, it suggests their stock picking and portfolio strategy is working. In that case, continuing with their current approach is likely the better course of action.