While the FTSE 100 may have delivered an impressive annualised total return of over 8% since its inception in 1984, seeking to outperform the index could be a worthwhile pursuit.
Although beating the index may not be an easy task, by focusing on the best value large-cap stocks, it may be possible to post even higher returns than the FTSE 100 in the long run.
Furthermore, with high yields on offer and a number of global economic trends appearing to be ripe for investment, investors may be able to build a portfolio capable of delivering higher returns than the FTSE 100 in the coming years.
In doing so, they may be able to retire earlier than they previously expected.
While value investing may not be viewed as a particularly exciting pursuit by many investors, it has the potential to generate high returns. By focusing on companies that appear to be trading below their intrinsic value, it may be possible to reduce your risk and maximise your potential returns.
Of course, value investing does not just mean buying the cheapest stocks in the index. It also involves focusing on the growth prospects for a specific business and determining whether it is worth more than its current market valuation. As such, it may be the case that the cheapest stocks lack value, while more expensive shares are worthy of a premium due to their growth potential.
While it is difficult to accurately predict how the world economy will perform in future, it may be possible to gain an insight into potential growth trends. Demographic changes can provide guidance for investors on where demand may increase or decrease in the long run, with investors then being able to capitalise on this through buying stocks which may benefit from a future tailwind.
For example, a world population that is growing in size and living longer suggests that demand for healthcare may increase significantly. Likewise, wage growth across the emerging world is forecast to remain high, and this could lead to rising demand for a variety of consumer goods and services over the coming years. And with population growth in the UK expected to remain high over the next couple of decades, demand for housing could rise at a faster pace than current build rates.
By focusing on long-term trends and then drilling down to find the best stocks within a specific sector, investors may increase their chances of outperforming the FTSE 100.
While the FTSE 100 has risen from a starting price of just 1,000 points in 1984 to reach its current level, a large proportion of its total returns have come from dividends. Therefore, buying stocks with high income returns that have the potential to raise shareholder payouts at a fast pace could provide an investor with a better chance of beating the index.
Dividends may also provide cash flow during difficult periods for the economy that allow you to capitalise on lower valuations. Through buying low and selling high, you may be able to beat the index, get rich and retire early.
A world-famous investor once said “Be greedy when others are fearful”. Here at The Motley Fool, we firmly believe that taking a different investing approach could also lead to significant potential gains for you. Get on the inside track today by reading our “10 Step Guide To Making A Million In The Market.” Click here to download for your FREE copy now.
Peter Stephens 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.