It sounds like fantasy, doesn’t it? How can the FTSE 100 index of Britain’s largest public companies grow from today’s level around 7,200 to a mighty 22,000 in just 10 short years? That would mean the index increasing by around 200% — impossible!
Well, it’s happened before. Between January 1984 and January 1994, the Footsie moved from 1,063 to 3,491 – an increase of just over 228%. Over that period, inflation pushed general prices up around 66%, so that was a clear outperformance for the FTSE 100 and the firms driving the index.
Some market-watchers are getting excited
I’ll be the first to admit that the footsie didn’t do as well over the next couple of decades. Between January 1994 and January 2004, the index moved up around 26% to end close to 4,390, but during that move, the tech bubble pushed it to a whisker below 7,000 in December 1999. Meanwhile, inflation moved general prices up around 29%, so the FTSE 100 underperformed general prices,
Then, between January 2004 and January 2014, we saw a gain of about 48% ending at 6,510, but not before the index plunged down to around 3,760 in February 2009 in the wake of the credit crunch. Inflation pushed prices up about 38%, so the Footsie came out ahead.
It’s clear the progress of the FTSE 100 has been far from smooth, but the volatility is getting some market-watchers excited. One theory is that the volatility we’ve seen between 1998 and the end of 2017 forms a period of consolidation – or basing pattern – from which the FTSE 100 is breaking out ready for another extended uptrend. If you click on this link it will take you to the chart for the FTSE 100 on Yahoo finance. Set the chart to ‘max’ and you’ll see volatility and the consolidation pattern with the price breaking out as we go forward.
A new era of prosperity and growth?
I don’t know if we’ll see another period of big gains like we saw between 1984 and 1994, but to me, it makes sense that the credit-crunch 10 years ago meant a long period of rebuilding and recovery was necessary for the health of economies, personal and business finances. So, we could be about to emerge from such a recovery period into a new era of prosperity and growth.
Whatever happens next, regularly investing in a FTSE 100 tracking fund is a good idea because even if predictions of a large rise ahead fall short, buying the dips of the index has proven to be a good idea for the long run. Indeed, the Footsie has an over-weighting of firms operating in cyclical sectors, which leads to reliable bounce-backs. You can really work that situation to your advantage with pound-cost averaging. Drip feeding regular payments into a FTSE 100 tracker fund and choosing a fund that re-invests dividends along the way could take care of that for you and boost your returns in the long run.
I reckon a strategy of re-invested dividend income and regular investments mean it’s likely to be just a question of how large your gain will be if you invest in the FTSE 100 for the next 10 years, not whether you will lose or win.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.