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Why I’m a buyer of the FTSE 100 after its recent plunge

It has been a rocky 12 months for the FTSE 100. In May 2018, the UK’s leading stock index printed an all-time high of 7,877.4. Since then, the market has fallen by around 7%.

This performance is disappointing but, over the past six months, the numbers are much more encouraging. Since the end of 2018, the index has rallied by around 11% from its 52-week low of 6,584. All of the numbers above exclude dividends paid to investors during the respective timeframes.

Temporary headwinds

The Footsie 100, like many other major indexes, has been falling during the past few weeks due to the escalation of the trade war between the United States and China.

President Trump has unveiled a range of new trade restrictions against Asia’s largest economy, and City analysts are starting to speculate that these efforts will translate into a global economic slowdown. This will undoubtedly lead to a decline in corporate profits and falling share prices.

To add to these issues, the UK has its own set of problems. Political paralysis in Westminster has only made it harder to predict what the future holds for the UK economy, As a result, investors all over the world are selling UK assets, including the FTSE 100.

However, despite all of the above, I believe the FTSE 100 still looks attractive as a long term investment.

Look to the long term

It is very easy to let daily news flow, such as tariffs threats and the possibility of falling profits, to impact on your investment decisions. But in reality, these factors have a minimal impact on returns over the long term.

One of my favourite research documents is Credit Suisse’s Global Investment Returns Yearbook. In this publication, the investment bank’s research analysts consider the performance of global stock markets going back as far as data will allow, which is 119 years for most developed markets.

According to the data, between 1900 and 2018, which is one of the most turbulent periods in human history, UK stocks produced an average annualised return for investors of 5.4%, after accounting for inflation. By comparison, cash returned around 1% per annum after adjusting for inflation.

It’s difficult to underestimate how important these figures are. They show that no matter how bad things may seem right now, in the majority of the time, equities produce a positive return for investors over the long term, a performance that’s significantly above the gain on cash available during the same period.

Sit back and relax

Considering the data above, I’m more than happy to keep buying the FTSE 100 today despite all of the doom and gloom in the newspapers.

History suggests that no matter what happens over the next one or two years, 10 or 20 years from now, the global economy will be bigger and more developed than it is today. And I think it’s almost a certainty equity prices will be higher a decade from now than where they are currently.

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Rupert Hargreaves owns no share 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.