The UK’s leading stock index, the FTSE 100 printed a new all-time high last week. It has been steadily marching higher all year thanks to the falling value of sterling, which has pushed up earnings. More than two-third of the index’s profits come from overseas, so the sliding pound is good news for stock prices.
Year-to-date the FTSE 100 has gained 6.3% excluding dividends, and since the beginning of 2016, the index has added 21%, once again excluding dividends.
The picture is less positive if you look at it in dollar terms. In constant currency, the index has only gained 13% since the beginning of 2016. The big question is, will it hold on to these gains in 2018?
Time to sell?
2018 will be an exciting year for the FTSE 100. Throughout the year, there should be some more clarity on how the UK’s relationship with the EU will develop in the years ahead, and this will affect sterling. If sterling falls further, it’s more than likely that the index will head higher. However, if negotiations result in a positive outcome and sterling rises, it could retract some of its gains.
That being said, with economic growth taking off around the world, itsconstituents will likely benefit from organic earnings growth, which should push the FTSE 100 higher if all other factors remain equal.
The problem is that it’s almost impossible to predict what 2018 holds for it. Many different catalysts could send the FTSE 100 either rising or falling and trying to predict which factors will have the most significant impact and when requires a crystal ball.
How should investors react
The best way to protect your portfolio from a sell-off in 2018 is to do nothing. Spending time and money preparing for a crash that might never arrive is a colossal waste of effort and resources. Here at the Motley Fool, we believe that the best trading strategy for any market environment is to remain committed to a basket of high-quality stocks with a history of producing steady growth and returns for investors.
Companies like Unilever and GlaxoSmithKline might see their share prices drop in a market sell-off, but the underlying businesses will continue to produce results, and over the long term, these profits will filter through to investors.
As well as high-quality income and growth stocks, you can buy an FTSE 100 tracker for your portfolio. With a dividend yield of 3.8%, the index offers more income than almost all high-street bank savings accounts and the income stream is well diversified. Regular investing in a low-cost tracker is an easy way to grow your wealth with minimal effort. By reinvesting your dividends, you can also turbocharge your wealth creation.
So overall, it’s impossible to tell what the FTSE 100 will do next year, but if you’re a long-term investor, it does not matter.
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Rupert Hargreaves owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. 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.