Financial experts often advise that you can expect to generate returns of around 8-10% per year from the stock market over the long term. But is that kind of return achievable by investing in a simple FTSE 100 index tracker which tracks the performance of the UK’s largest 100 companies? Let’s take a closer look.
It’s fair to say that an investment time horizon of 10 years or more can be classified as ‘long-term’ investing. So let’s analyse the total returns from the FTSE 100 over the decade-long period to the end of 2017. The table below shows annual total returns from the start of 2008 to the end of 2017.
FTSE 100 annual total returns
Source: FTSE Russell
Looking at the annual returns over that period, we can see that the index had some good years, some average years and one terrible year.
For example in 2008, we had the Global Financial Crisis (GFC) and the FTSE 100 returned -28.3% for the year. £10,000 invested at the start of 2008 would have been worth just £7,170 by the end of the year.
On the other hand, over the 10-year period there were three years where the index performed particularly well, returning 27.3%, 18.7% and 19.1% in 2009, 2013 and 2016, respectively.
Overall however, for the total period to the end of 2017, the FTSE 100 index generated a total return for investors of 74%. While that’s not a terrible return, it’s not overly impressive either. On an annualised basis, that equates to a return of just 5.7%. That’s significantly below the 8-10% return that many investors were probably expecting.
Now, obviously, that’s just one 10-year period in history. And the returns for this were dragged down significantly by the performance of global markets during the GFC. A market event like that doesn’t come along very often. Yet the key takeaway here, in my opinion, is that investors shouldn’t bank on the FTSE 100 returning 8%-10% per year. It may return this figure over some time periods, but at other times it may underperform. So how can investors improve their returns?
One option is to consider adding exposure to faster-growing mid-cap stocks through the FTSE 250. This index holds the 250 largest companies outside the FTSE 100. Its 10-year performance is shown below.
FTSE 250 annual total returns
Source: FTSE Russell
While this index did fall harder than the FTSE 100 in 2008, it also rebounded more powerfully in 2009. It has also generated some fantastic performances over the decade, returning over 25% annually on four separate occasions. Even with the big fall in 2008, the index generated a total return of 158% for the 10-year period which, on an annualised basis, equates to an excellent return of 9.9% per year. That’s significantly higher than the return from the FTSE 100 over the same period.
The lesson here is that if you’re looking to achieve strong long-term returns from the stock market, don’t limit your exposure to the FTSE 100. Consider adding FTSE 250 stocks to your portfolio if you’re looking to generate returns of 8%-10% per year from the stock market over the long run.