Investing in the FTSE 100 a decade ago could have been seen as a risky move by many investors. The index was trading at around 5,200 points after what had been one of the most challenging periods in its history.
The financial crisis had caused the index to halve compared to its 2007 peak. Although it had delivered a strong recovery in the months following this decline, the prospects for the global economy continued to be highly uncertain in 2010.
Despite this, the index has gone on to deliver a 46% capital return since then. This works out as an annualised return of 3.8%. When dividends are added to this figure, the total return is over 8% per annum. As such, investing £1k or any other amount in a FTSE 100 tracker fund 10 years ago would have been a shrewd move, with it now likely to be worth around £2,150.
While many investors would have felt nervous about buying FTSE 100 shares in 2010 due to the difficulties posed by the financial crisis, the track record of the index shows that it has always recovered from its downturns to post new record highs. Examples include the 1987 crash, as well as the bursting of the tech bubble. Therefore, while the financial crisis was a deeper and larger crisis than the FTSE 100 had perhaps ever seen before, the index ultimately recovered within a matter of years.
This highlights the cyclicality of the index, and why it can pay to buy large-cap shares while they trade on low valuations. They can provide you with a more favourable risk/reward ratio which ultimately leads to higher returns in the long run.
FTSE 100 outlook
While buying shares today may not seem as risky as it did a decade ago, a number of challenges could be ahead for investors. They include the ongoing trade war between the US and China, Brexit negotiations and geopolitical risks in the Middle East. Any one of these risks, as well as a range of other threats, could derail the FTSE 100’s current bull run.
As such, investors seem to have factored in many of the risks faced by the index. It offers a dividend yield in excess of 4% despite experiencing strong growth since its post-financial crisis lows, while many of the index’s members trade on lower valuations than their historic averages. This may mean that now is a good time to buy a tracker fund, with the index offering long-term growth potential.
Beating the market
For investors who wish to try and beat the FTSE 100’s performance, a number of sectors such as banking, retail, industrials and energy appear to offer wide margins of safety. Buying high-quality companies at low prices could enable you to generate even higher returns than the index in the long run. With it being cheaper than ever to build a diverse portfolio and the index appearing to offer good value for money, now could be a good time to buy stocks – just as it was a decade ago.
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.