Making a 100% return on FTSE 100 shares may sound impossible at first glance. After all, the index is still trading below its previous highs and faces an uncertain outlook caused by economic difficulties.
However, its past performance suggests that taking a long-term view when holding high-quality companies could be a profitable move. While it is never guaranteed to lead to positive returns, it could increase the chances of doubling an initial investment in a stock market rally.
A long-term view when investing in FTSE 100 shares
The past performance of FTSE 100 shares shows that they have delivered relatively high returns over the long run. For example, the index was established in January 1984. Since then, it has risen from 1,000 points to reach its current level of above 6,600 points. That’s an annual capital return of over 5%. When reinvested dividends are added to that figure, it means that the index has delivered an annualised total return in excess of 8%. If the index returns the same amount in future, an investment could double within nine years.
Clearly, past performance is never a guide to future gains or losses. However, during the FTSE 100’s 37-year history, it has experienced many downturns that have caused major declines for shares. They have included bear markets such as the 1987 crash, the dotcom bubble and the global financial crisis. Although they have caused its price level to decline dramatically at times, the index has thus far always recovered to post new record highs. As such, it seems likely, but not definite, that a long-term view allows an investor to overcome short-term challenges to benefit from the stock market’s growth potential.
Investing money in high-quality shares
Buying high-quality FTSE 100 shares could be a means of obtaining higher returns in the long run, as well as lower risks. For example, companies with solid balance sheets may be less likely to struggle during uncertain economic periods. Meanwhile, businesses that have wide economic moats may be capable of delivering higher margins than their peers. This may result in faster-growing profitability over the long run.
Of course, buying companies that have such qualities is never a guarantee of avoiding losses or making gains. Any company can experience significant difficulties. However, by focusing on stocks that have such characteristics, it may be possible to reduce overall risk to some extent, and to benefit from stronger performance in the long run.
Managing risk when buying shares
A focus on high-quality FTSE 100 shares is just one means by which risk can be reduced. Diversification is another prudent step, since it reduces the risk of one company negatively impacting on an entire portfolio’s performance. While it does not guarantee investment success, alongside a long-term view and a focus on high-quality stocks, it could increase the chances of doubling an initial investment.
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.