The FTSE 100 has experienced a volatile start to 2020. Its price level has been highly changeable in the first month of the year, with initial investor optimism giving way to concerns about the spread of coronavirus and its potential impact on the world economy.
While further uncertainty may be ahead in the near term, the FTSE 100 could offer long-term growth potential. As such, investing £1k, or any other amount, today over a period of 10 years could lead to sizeable returns.
Since its inception in 1984, of course, the FTSE 100 has experienced a significant amount of disruption, risks and periods of volatility. Despite this, it has risen from 1,000 points in January 1984 to trade at 7,500 points at the time of writing. This equates to a capital return of around 5.8% per annum.
When its dividends are added to that figure, it equates to a total annualised return of around 9%. Assuming a similar rate of growth in the next decade would mean a £1k investment today would be worth around £2,367 in 2030 – assuming dividends are reinvested.
Returns of ‘two halves’
Of course, the FTSE 100’s performance has been somewhat disappointing over the past 20 years. In fact, it reached a price level of 6,930 points at the very end of 1999. Since it trades only 8.2% higher than that level today, its annualised capital return since 1999 has been just 0.4%.
The main reasons for its disappointing returns over the past two decades have been a high valuation in 1999, as well as the impact of the global financial crisis. The index was significantly overvalued in 1999 as the tech bubble grew in size. And, just a few years following the bursting of the tech bubble, the index faced the largest recession since the Great Depression of the 1930s.
As such, in the past 20 years, it has failed to live up to its annual capital growth rate of 12.9% which was recorded in the 16 years from its inception at the start of 1984 until the end of 1999. In this sense, its performance has been akin to ‘a game of two halves’, where the index’s performance prior to the millennium was strong and its growth since then has been rather disappointing.
With the FTSE 100 having a dividend yield of 4.4% at present, it seems to offer good value for money. This suggests it could deliver an improving performance compared to that experienced over the past two decades. This may mean an investment today records a relatively high total return over the next decade.
As such, now could be a good time to buy a range of FTSE 100 stocks while they trade on low valuations. They may experience an uncertain near-term future, but history shows that they could improve your financial position in the long run.
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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.