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3 ways you could beat the FTSE 100

History shows that over long periods of time, returns from the stock market beat other assets, such as cash, bonds and property, hands down. This is why we trumpet stock market investing here at the Motley Fool. It really does give you the best chance of building your long-term wealth, and achieving financial independence.

Furthermore, it’s dead easy these days, and accessible to anyone who can set aside from as little as £25 a month for regular investment.

We often sing the praises of low-cost FTSE 100 trackers. These are funds that simply track the returns from the index of the 100 biggest companies listed on London’s stock exchange (less a small annual management charge). Everyone’s heard of the FTSE 100, which has been around since 1984. And with it including many familiar giants such as HSBC, Shell and GlaxoSmithKline, new investors can feel relatively comfortable.

You’ll do very nicely from a FTSE 100 tracker over the long term, if history is anything to go by. But there are ways you could aim to beat the returns of the ‘Footsie’ — and achieve financial independence that bit sooner.

Mid-cap index

There are funds that track indexes other than the FTSE 100. The FTSE 250 contains the next biggest 250 companies after the top 100. It includes Domino’s Pizza, McCarthy & Stone, and TalkTalk Telecom, as well as less familiar firms.

In theory, this mid-caps segment of the market contains businesses with scope for more dynamic growth than the giants of the FTSE 100. And the FTSE 250 has a record of higher returns since its launch in 1992.

US index

The US’s S&P 500 index, which began in its present form in 1957, also has a long history of outperforming UK cousin the FTSE 100. Again this makes sense when you consider the US’s huge domestic market and international clout. An S&P 500 tracker gives you a stake in companies such as Amazon, Facebook, Johnson & Johnson, JP Morgan Chase and Microsoft.

Individual stocks

Another way you might hope to better the returns of the FTSE 100 is to pick a portfolio of individual stocks. Beating the market is easier said than done, as there are plenty of studies showing a majority of investors do no better than if they’d bought a simple index tracker. However, it’s certainly possible to outperform the market by picking individual stocks, and certainly many investors are keen to try.

I’ll give you one example of a company that should, in theory, deliver superior returns to the market. Schroders is an asset manager and, when financial markets are thriving, the nature of the business means profits tend to be magnified. It can be seen as a geared proxy for indexes like the FTSE 100. Provided the business is well managed, its shares — if bought at a fair price — should outperform the market over the long term.

Returns

The table below shows 10-year annualised returns for the three indexes and one company I’ve mentioned, and how much £1,000 invested 10 years ago would be worth today.

 

Annualised return

Return on £1,000

FTSE 100

9.0%

£2,368

FTSE 250

12.7%

£3,305

S&P 500

14.3%

£3,805

Schroders

15.0%

£4,047

Of course, there’s no guarantee that past outperformance will continue in the future. But if you’re looking to achieve financial independence sooner, it could be worth looking beyond just a FTSE 100 tracker.

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G A Chester has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK owns shares of and has recommended Amazon, Facebook, GlaxoSmithKline, and Microsoft. The Motley Fool UK has recommended Domino's Pizza, HSBC Holdings, and Schroders (Non-Voting). 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.