Should You Give Up On The FTSE 100?

On New Year’s Eve 1999, investing in the FTSE 100 seemed like a great idea. After all, it had risen from its starting point of 1,000 points in 1984 to reach 6,930 points by the end of the 21st century. That is a stunning rate of growth and, of course, does not include dividends or the positive impact of reinvesting them.

Back then, investing in other asset classes seemed like a rather silly idea. After all, the housing market had lagged the FTSE 100 and bonds seemed unnecessary when shares were performing so well. And, with the internet starting to gain in popularity, the long term future for investors in the FTSE 100 seemed to be very bright and hugely profitable.

Today, though, the FTSE 100 sits at 6,400 points, which is over 500 points lower than its 20th century closing level. Since the eve of the new Millennium, it has endured a bubble bursting, 9/11 and a global financial crisis. Today, the resources decline and Chinese slowdown are also contributing to weak market sentiment and, in reality, many investors will be wondering why on earth they have paid any attention to the FTSE 100 over the last (almost) sixteen years. It has been a poor place to invest.

As a result, it could be argued that it is time to give up on the FTSE 100. After all, other asset classes such as property have soared in recent years and are now seen as far better places to invest than shares. That’s at least partly because a fundamental supply/demand imbalance exists within the UK property market which seems set to continue over the coming years.

However, the best times to invest are always when the future appears most bleak. Back in 1999, the FTSE 100 was the hot topic on everyone’s lips. People from all walks of life had made serious money on the privatisations of the 1980s and were moving into high-growth internet stocks. They were genuinely excited about the future for the index and, in most cases, could see no downside.

Today, though, the FTSE 100 has been replaced by the property market as the topic of discussion for investors across the UK, as house price growth in the south east of England has made many individuals paper millionaires. Investors in the FTSE 100, meanwhile, are reliant upon dividends to provide a positive total return and, therefore, they have very little to shout about.

The FTSE 100, though, has huge appeal. For starters, it offers excellent liquidity and the ability for all investors to easily diversify between different stocks, industries and geographies. This is extremely relevant at a time when the emerging world offers huge long term growth opportunities. Furthermore, a number of FTSE 100 stocks appear to offer excellent value for money and, with the index yielding close to 4%, it seems to be relatively cheap by historical standards and capable of not only providing strong income prospects, but also the scope for impressive capital gains.

Meanwhile, other assets such as property or bonds may have enjoyed purple patches in recent years, but just as the FTSE 100 was the talk of the investment world in 1999, they may be about to endure a very rough patch. Interest rate rises are coming and, for both asset classes, this is likely to act as a brake on future capital gains.

So, while the FTSE 100 has been a poor performer since 1999, now could be the perfect time to buy into it. Certainly, it may not feel like the right decision when other asset classes continue to offer capital gains in the short run but, based on logic, it appears to be the right place in which to be invested for the long term.

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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.