The FTSE 100 has made a staggering recovery over the past seven days. From a low of 5,879 printed on 29 September, the index has rallied 7.7%, to 6,332 at the time of writing.
However, the big question is: will this rally continue? There’s been little in the way of encouraging economic news released during the past week, and while the price of oil has rebounded, other commodity prices have remained relatively unchanged.
Value hunting
The consensus seems to be that the past week’s rally has been driven by value hunters seeking bargains in a depressed market. Many analysts believe that sections of the market such as the miners, banks and oil companies are oversold.
For example, Morgan Stanley recommended that investors buy miners yesterday. The bank’s analysts cited the stable economic data released from China during the past few months, which should boost commodities in the long-term.
Anheuser Busch Inbev’s offer for SABMiller has also helped lift the index, and oil’s near 10% rally from the lows at the beginning of October has sent the likes of Shell and BP soaring.
But this rally may be short lived. Some analysts are suggesting that after Chinese traders return to their desks following Golden Week — the seven-day holiday marking the country’s National Day on 1 October — commodity prices will lurch lower again.
This could drag the miners and FTSE 100 back to the lows seen at the end of September.
A long-term view
Of course, the long-term investor shouldn’t be concerned with what the FTSE 100 is going to do in the next few days and weeks. As a wealth of research has shown, it is almost impossible for the average investor to beat the FTSE 100 over the long-term. Specifically, according to research conducted by a number of financial institutions, the average investor has only returned 2.5% per annum including dividends over the past two decades.
On the other hand, the FTSE 100 has risen at a rate of around 5.4% per annum over the same period. During this period, the market has seen the dotcom bubble and the financial crisis. Those two events have sent the FTSE 100 surging to a high of nearly 7,000 and crashing to a low of around 3,000.
Most analysts and academics agree that the reason investors tend to underperform is because they trade too much. Or in other words, investors try to beat the market by attempting to be clever, but on average, they only end up losing money. Fees eat away at returns and many investors often buy high and sell low, erasing much of their capital in the process.
The best way to avoid these dismal returns and rack up a performance that is at least in line with the wider market, buying and holding a fund that tracks an index is an excellent way to go.
