It’s fair to say that the performance of the FTSE 100 index (INDEXFTSE: UKX) over the last two decades has been disappointing.
20 years ago, on 31 July 2000, the FTSE 100 closed at 6,365 points. Yesterday, the index closed at 5,990 points meaning that it has literally gone backward in two decades.
Of course, when you factor in dividends – which tend to make up a significant proportion of long-term total stock market returns – overall returns over 20 years will have been positive.
Yet realistically, the long-term returns from the FTSE 100 have not been great. Especially when you consider that the main US stock market index, the S&P 500, has delivered a return of about 125% plus dividends over the last 20 years.
This underperformance begs the question: what’s the best move now? Is it worth sticking with the FTSE 100 index? Or is there a better approach to investing?
Why has the FTSE 100 underperformed?
To answer that question, we should first look at why the FTSE 100 has struggled over the last 20 years.
The main reason the Footsie has delivered underwhelming returns is that many of the companies with the largest weightings in the index have struggled to generate growth in recent years.
For example, there are the oil majors Shell and BP. They are struggling for growth due to low oil prices and the increasing focus on sustainability.
Then, you have banks such as HSBC, Barclays, and Lloyds. These companies are struggling due to low interest rates, the economic environment, and competition from FinTech.
You also have tobacco companies such as British American Tobacco that are facing huge challenges, and slow-moving telecommunications giants such as Vodafone and BT.
Compounding this growth issue is the fact that the FTSE 100 has very little exposure to the technology sector. Whereas the S&P 500 has a number of tech powerhouses such as Apple and Microsoft, the FTSE 100 only has a handful of smaller tech companies such as Sage and Rightmove.
When you break down the FTSE 100 index like this, it’s easy to see why it has underperformed.
These 3 moves should improve your returns
Given the structure of the FTSE 100, I think there’s a real case for being selective about your investment choices, going forward.
Instead of just investing in a FTSE 100 tracker fund, and gaining exposure to the whole index, I’d be a little more ‘active’ and build a portfolio that is focused on the best investment opportunities in order to target higher returns. Specifically, I’d make three key moves.
Firstly, I’d focus on the best stocks within the FTSE 100. I’m talking about the types of stocks that top fund managers such as Terry Smith and Nick Train invest in such as Unilever, Diageo, and Sage. These kinds of stocks are proven long-term performers.
Secondly, I’d add plenty of exposure to international markets such as the US, Europe, and Asia. Many of the world’s top companies such as Apple and Microsoft are listed overseas. You can gain international exposure easily through funds and ETFs.
Finally, I’d look at investing in some high-quality UK companies that are outside the FTSE 100. Adding some mid-cap and small-cap stocks to your portfolio can really turbo-charge your returns. If you’re looking for ideas in this space, you’ll find plenty at The Motley Fool.
Follow this more active approach, and I think it’s highly likely you’ll outperform the FTSE 100 index over time.
Edward Sheldon owns shares in Unilever, Sage, Diageo, Rightmove, Apple, Microsoft, Lloyds Banking Group and Royal Dutch Shell. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has recommended Barclays, Diageo, HSBC Holdings, Lloyds Banking Group, Rightmove, Sage Group, and Unilever and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.