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Just Because The FTSE 100 Is At An All-Time High Doesn’t Make It Expensive

You might have expected investors to celebrate the fact that the FTSE 100 has finally recaptured its all-time high, but you’d be wrong.

Instead there has been a lot of carping about how dangerous it must be to invest right now. The FTSE’s success has actually made investors more nervous.

Pessimists assume that because the FTSE 100 is riding so high, it must be overpriced. But the pessimists have got it wrong.

Bubble And Squeak

When the FTSE 100 hit its famous peak on  31 December 1999, it was horribly overvalued.

That was partly due to pre-Millennium froth, but mostly down to the technology bubble, which saw crazed investors throw money at dotcom stocks that were burning through cash, and would eventually burn out.

Today’s market is trading at a much more sensible valuation, because in contrast to 1999, it is underpinned by actually profits.

Half The Price

As Laith Khalaf, senior analyst at Hargreaves Lansdown, has pointed out, the FTSE 100 was trading at 30 times earnings in December 1999.

Today, it sits at 16 times earnings, only fractionally above its long-term average of 15 times earnings.

This means the FTSE 100 is 50% cheaper today than it was 15 years ago.

Glory Days

That partly explains why the index has taken so long to recapture its former glories. That’s because those heights were an illusion, borne on a bubble that would burst within three months.

Another factor that will surprise the pessimists is that the total return of the FTSE 100 since Millennium eve, including dividends reinvested, is actually 67%.

If you had invested £10,000 in the FTSE 100 on 31 December 1999, you would have around £16,700 today, before charges.

The total growth figure rises to 89% on the FTSE All-Share, turning your £10,000 into £18,900.

The Forgotten Bull Run

I don’t blame investors for feeling negative. After the runaway fun of the 1980s and 1990, the market has endured a turbulent 15 years. Political pessimism is rampant. We no longer believe that things can only get better.

Now we only expect it to get worse.

But you have to rein in that pessimism, otherwise you risk doing daft things long by sitting out on the bull run of the last six years.

The optimists have called the market right. The FTSE 100 has beaten its all-time high and set its sights on 7000.

And it isn’t even expensive.

As the FTSE 100 total return figures show, you can make serious wealth by investing in the stock market over the long term.

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Harvey Jones has several FTSE 100 and FTSE All-Share trackers. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.