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Frustrated by low FTSE 100 returns? Here’s what I’d do

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A stock price graph showing growth over time, possibly in FTSE 100
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The FTSE 100 can be a frustrating index at times. Sure, it’s had a good run so far in 2019, rising around 12%, but long-term returns are not so flash. For example, for the five years to the end of June, the index only managed to eek out an underwhelming return of 6.1% per year. Meanwhile, if you zoom out on a FTSE 100 chart, you’ll see that the index is only around 10% higher than it was at the end of 1999.

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Look overseas

One way you can potentially boost your overall portfolio returns is to allocate some capital towards international stocks. The US’s S&P 500 index could be a good place to start. If you look at the performance of this index, you’ll see that it has thrashed the FTSE 100 in recent years. For example, for the five years to the end of June, it returned 11.3% – nearly twice the return of the FTSE 100.

Of course, there’s no guarantee that the S&P 500 will continue to outperform the FTSE 100 in the future. However, I believe that having some exposure to this index gives you a good chance of outperforming the FTSE 100 over time. The reason I say this is that the S&P 500 has substantial exposure to fast-growing technology companies such as Apple, Amazon, and Alphabet (Google). By contrast, the FTSE 100 is dominated by lower-growth businesses such as oil companies and banks and has very little exposure to the technology sector. As such, the FTSE 100’s returns going forward could continue to be sluggish.

By diversifying your portfolio so that it has exposure to high-growth companies listed overseas, you may be able to boost your overall returns. But is there an easier option closer to home?

Consider smaller companies

Yes. You don’t necessarily have to look abroad to find faster growth than the FTSE 100. Another strategy that could help you outperform the FTSE 100 is allocating money to mid-cap and small-cap stocks. Smaller companies often grow at a faster rate than their large-cap peers, which means that investment returns can be higher.

This is well illustrated by the performance of the FTSE 250 index, which tracks the performance of the 250 largest companies outside the FTSE 100. Over the five-year period to the end of June, this index returned 7.3% per year, outperforming the FTSE 100 by 1.2% per year. Meanwhile, the FTSE SmallCap index – which tracks the performance of the 351st to the 619th largest-listed companies on the London Stock Exchange main market – returned 7.7% per year over this period.

If you’re a risk-tolerant investor, you could also consider an allocation to small-cap stocks listed on the Alternative Investment Market (AIM). These kinds of stocks can be highly volatile, but they can also generate fantastic returns. Look at online fashion retailer Boohoo Group for example – its share price has climbed around 530% over the last five years.

In summary, if you’re frustrated by the performance of the FTSE 100, a little diversification could help you boost your returns. Just remember that risk management is important. You don’t want to be overexposed to any particular market or type of stock.

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Edward Sheldon owns shares in Boohoo Group. The Motley Fool UK has recommended boohoo group. 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.

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