The FTSE 100 – sometimes called the Footsie, in slang – is an index made up of the 100 largest companies listed on the London Stock Exchange (LSE).
The level of the FTSE 100 is calculated using the total market capitalisation of all the constituent companies, which is converted to the single index value we keep hearing about on the news.
A big gain over time
As I write, the FTSE 100 stands near 7,400. That’s quite an achievement considering it started its life way back on 3 January 1984 at an index value of 1,000. In just over 35 years, it has increased by more than 640%.
But if you look back 20 years instead of 35 years, it was at about 6,240, just 16% below today’s level – it has gone almost nowhere in 20 years! However, two decades ago the stock market was in the grip of a raging bull market and valuations were elevated.
Indeed, the ‘dotcom boom’ was in full swing back then. But what followed was the so-called tech-wreck, which was essentially the bursting of that giant bubble. Investors realised that many of the dotcom businesses they were punting on were actually worthless and the FTSE 100 plunged as a general bear market took hold. By the spring of 2003, it was down as far as 3,600.
It then rose again to reclaim its previous peak before plunging at the end of 2007 when the credit crunch arrived. And now, over the past 12 years, it has clawed its way back to the highs again.
Compounding returns from the index
It is fair to say that the FTSE 100 has been a good mirror of major economic and international events over the years. But I also see it as tending to expand over the long haul. We can see that effect in the record since 1984. It makes sense, for example, that over long periods of time, company profits will rise along with market capitalisations just to keep up with inflation.
You will also notice that the index has always, so far, bounced back from its lows. That is a great attribute and useful if we can base an investment on the FTSE 100. And we can. FTSE 100 tracker funds are passive, low-cost investment funds that aim to replicate the performance of the FTSE 100.
But as well as following the level of the index, a tracker fund will pay you an approximation of the FTSE 100’s dividend yield too. And if you choose the accumulation version of the fund it will automatically reinvest the dividends for you. If you do that, you will likely compound your investment and outperform the headline figures the index achieves.
To me, ‘right now’ is a great time to invest in the FTSE 100 and I’m bullish about the returns it could provide investors over the next few decades.
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Kevin Godbold has no position in any 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.