Is The FTSE 100 Just Roulette By A Different Name?

Is investing in the FTSE 100 (INDEXFTSE:UKX) little more than a punt?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The last two months have seen a level of volatility in the FTSE 100 which has not been present for many years.

Firstly, it collapsed from around 6800 points to as low as 5850 points within the month of August as concerns surrounding Chinese growth potential caused fear among investors to soar. Then, it recovered to 6,200 points in the following days before shifting violently between loss and profit so that it yo-yoed up and down day-by-day (and sometimes hour-by-hour).

The last ten days have seen it rise from around 5,900 points to over 6,400 points and, at the present time, investors seem to be relatively upbeat about the index’s future. This, though, can change very quickly and could understandably lead to many investors thinking that the UK’s main index is little more than a roulette wheel in a posh frock.

In the short run, this appears to be true. Buying the FTSE 100 now with a one day, one week or one month timeframe is little more than a punt. Within that space of time, it really is anyone’s guess as to which way it will move and by how much, thereby making it a gamble rather than an investment.

However, over a longer period of time, say three to ten years, the FTSE 100 is a whole lot less like playing roulette. In fact, it could be argued that luck or chance play only very small parts in the long term performance of the UK’s main index.

That’s because it is a reflection of the financial success of some of the largest companies in the world. Therefore, by investing in businesses which have attributes such as a wide economic moat, a competitive advantage, an appealing valuation or a product which offers strong growth potential, it is possible to benefit directly from their success. And, while not all companies will see their profitability rise over the long run, for the savvy investor there are opportunities to identify unique business models and strong management teams which can deliver bottom line growth over a sustained period of time.

In fact, it is the growth in profitability which has the main impact on a company’s share price performance in the long run. Although investors may reward increasing dividends and a bright future outlook with higher valuations, realistically it is the delivery of consistently high profit growth which causes share prices to rise at a rapid rate.

This contrasts sharply with the short term gyrations of the stock market, which are based on emotion rather fact. For example, in the last two months very little has changed in terms of the financial performance of the FTSE 100’s constituents, but investors have been fearful, greedy and now they are somewhere in between.

So, while over the next two months the FTSE 100 may climb back to 7,000 points or drop back to 5,850 points, nobody really knows. However, in three, five or ten years’ time, buying shares in high quality companies now is likely to prove to be a shrewd move.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. 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.

More on Investing Articles

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »