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Why A FTSE 100 Soaring Above 7,000 Would Be Bad News

So the FTSE 100 is edging ever closer to the supposedly magic 7,000 level after climbing to 6,958.9 points this week, the highest it’s been since 1999. What does that mean, and would it be a good thing?

Firstly, let me dispel any nonsense about stock market investors being no better off today than they were back in 1999. For one thing, since the peak back in the dot com bubble days, London’s top index has also been providing dividends, and they’d bring the return over the peak-to-peak period to around 50%.

Diversification

And sensible investors would have done better than that, as they’d have had the bulk of their money in solid blue-chip stocks and not in those stupidly-overpriced dot com ones. Unilever shares, for example, are up 150% since the end of 1999 on top of the solid dividends they’ve been paying. Even Centrica, after its recent shock fall, is up 86% since 1999, and it’s been paying market-beating dividends too.

Sure, you might have had a bank or a supermarket in your portfolio, but even then I think you’d have been unlucky if you didn’t at least double your money over the period. And that’s assuming you invested all your cash at the 1999 peak too! In reality, people investing regularly over the long term will have picked up shares at much cheaper prices and will have done significantly better than that.

And that’s why I think a soaring FTSE would be bad news — at least for most of today’s investors.

Don’t you want to buy cheap?

You see, unless you’re in the minority of investors winding down their positions and starting to take cash to fund their retirements, you’re going to be a net purchaser of shares in the coming years — and you surely want to pick them up as cheaply as possible, don’t you? So why would you cheer a strongly-rising FTSE?

Even after decades of investing, I’m still perplexed by people who run away from the stock market during slumps when shares are cheap, which is precisely when they should be buying — and they pile back in when things are looking rosier and shares are considerably more expensive. And you don’t have to listen to me — it was ace investor Warren Buffett who urged us to “be fearful when others are greedy and greedy when others are fearful“.

But people act emotionally rather than rationally, and that brings me to another worry.

We’ve not seen the last

I can’t help seeing today’s bullishness as being a little too optimistic. The UK and US economies are recovering well and China’s much-feared slowdown has yet to happen, but I really don’t think we’ve seen the last of the pain from the eurozone. Figures for the zone as a whole are starting to look better, but that ignores the vast disparity between north and south — and the increasingly fractured nature of the union.

A new eurozone market slump would hit the FTSE, and that would surely send emotional investors into a new cycle of getting the greedy/fearful thing wrong again.

What's the best way to invest? Regularly putting money into solid dividend-paying stocks is surely the best way to Buffett-style wealth.

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The Motley Fool has recommended shares in Centrica and owns shares in Unilever.