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Why the FTSE 100 could be in for another ‘lost decade’, and what you should do

It’s fascinating the effect a short FTSE 100 bull run can have on sentiment — but is it rational?

Sure, at 7,350 points as I write, London’s top index is up 26% since February 2016’s low point, and that’s a veritable sprint in terms of the way big stock market indices tend to move in the long run. And yes, it’s also reaching all-time record highs.

But let’s put that into perspective. 

Lost decade

If you’d asked investors 10 years ago, when the FTSE 100 stood at around the 6,360 level, how long they thought it would be before it put on that additional 1,000 points… Well, with the index still coming out of the dot com bust and still below 1999’s peak, surely even the most pessimistic wouldn’t have thought it would be more than five years, tops.

In truth, the past decade has seen the FTSE 100 gain a rather pathetic 16.5%, including the recent much-lauded surge — even a savings account, in one of the worst periods for savings accounts in decades, would have beaten that. 

And since December 1999’s peak we’ve seen a rise of less than 6%.

What rally?

Let’s face it, most of the recent rally has come after last year’s Brexit referendum, and it’s down to just one thing — the fall in the value of sterling. There’s been no improvement in confidence, and no real uprating of FTSE shares — quite the opposite, in fact, as we’re almost certainly headed for a weak economic decade after the great British public voted to cut their noses off to spite their faces.

Shares are not more highly valued now in global terms, it’s just that the money we Brits have to pay to get them is now worth a lot less. While the FTSE 100 has gained 15% since the eve of the vote, the pound has lost the same against the dollar — UK-listed stocks are still valued exactly the same in dollar terms.

A dim future

I don’t see things getting any better over the next decade either. I expect sterling will remain erratic until the Brexit hot-air war starts to cool and we get some idea of what our departure will look like. But in the longer run, I reckon the markets will come to realise that the UK economy won’t be quite the basket case they originally feared and that, actually, the pound perhaps isn’t such a worthless currency overall.

In short, I expect to see a recovery in Sterling over the next decade, which would put downward pressure back on the FTSE 100 again. And I don’t see any fundamental cause for rises in company valuations to do much more than just counter that.

I see another lost decade ahead, and I wouldn’t be surprised to see the FTSE 100 in 2027 only around 20% higher than today.

What should we do?

The answer for investors, thankfully, is simple — forget the arbitrary levels of the FTSE, and buy shares with good dividend yields.

There are big ones available from top housebuilders like Taylor Wimpey (7.5%), oil giants BP (6.9%) and Royal Dutch Shell (7.1%), banks like Lloyds Banking Group (6%), utilities companies like SSE (6.5%), insurers like Legal & General (5.9%), and miners like Rio Tinto (6.1%).

With a diversified selection from these sectors, an average yield of 5% should be achievable, and that will get you a 50% return over 10 years (and even more if you reinvest it each year).

Beat the FTSE

I reckon securing regular dividends is just one step on the road to financial security. To find out more, get yourself a copy of The Foolish Guide To Financial Independence. Looking at ways to reduce your outgoings while building your cash, and giving you a few ideas for great investments, this brand new report is a must-read for any aspiring millionaire.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended BP, Lloyds Banking Group, Rio Tinto, and Royal Dutch Shell. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.