Why it’s essential that you invest outside the FTSE 100

If you’re relying on the FTSE 100 (INDEXFTSE:UKX) index to fund your retirement, you need to read this.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Financial experts often advise that as an asset class, shares will generate returns of 8%-10% per year over the long term. As a result, many individuals base their retirement planning around these calculations.

However if you’ve been relying on the FTSE 100 index to generate this kind of return on your capital, I have some alarming news for you. Over the last decade, the FTSE 100 has not generated that much. In fact, the index hasn’t generated anywhere near this return. Admittedly, a decade ago markets were near all-time highs and since then we’ve experienced the Global Financial Crisis as well as several other periods of high volatility. However, if you’re relying solely on the FTSE 100 to fund your retirement, the returns may not be as high as you’re anticipating. 

Let’s take a closer look at the blue chip index’s performance figures.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Dismal returns

It’s fair to say that over the last decade, the FTSE 100 has been an underachiever.

Take a look at the tables below which show the yearly returns of the FTSE 100, the FTSE 250 and the S&P 500. 

Capital appreciation return (not including dividends)

  FTSE 100 FTSE 250 S&P 500
5 year 4.9 10.4 10.9
10 year 1.5 5.0 5.2
15 year 2.2 7.8 4.9

Total return with dividends reinvested

  FTSE 100 FTSE 250 S&P 500
5 year 8.9 13.5 13.3
10 year 5.4 7.9 7.5
15 year 6.0 10.8 7.1
(Return figures sourced from Bloomberg and calculated up to the end of March 2017)

 

The tables show, that over the last decade, the FTSE 100 has returned just 1.5% per year on a capital appreciation basis, and 5.4% with dividends reinvested. By contrast, the mid-cap FTSE 250 index has returned 4.6% per year on a capital appreciation basis and 7.9% with dividends. 

I’ve also compared the two indices’ performance to the S&P 500. The US index has outperformed the FTSE 100 over five, 10 and 15 years, returning 5.2% a year or 7.5% with dividends reinvested over the last decade. 

Key takeaways

To my mind, there are several fundamental takeaways from these performance figures.

The first involves diversification. It would appear that to achieve the coveted 8%-10% per year over the long term, you really need to invest outside the FTSE 100 index. To be properly diversified, a portfolio should have exposure to different geographical regions and market capitalisations. Many investors suffer from ‘home bias’, preferring only to invest in locally-listed stocks, but having exposure to international stocks could potentially boost portfolio returns. 

Similarly, adding exposure to a mid-cap or small-cap index such as the FTSE 250 could also drive portfolio returns higher. High-quality smaller companies generally outperform their larger peers over the long term, and by having exposure to this area of the market, it could make a significant difference to your performance figures in the long run. 

The figures also highlight the importance of dividends. Many investors ignore dividends, focusing on capital growth in an attempt to build wealth quickly. However, dividends when reinvested, consistently make up the bulk of total investment returns over the long term. It’s therefore important to focus on generating dividends and reinvesting them.

So don’t always rely on experts’ assumptions when building wealth for the long term. While you would think that an index of 100 stocks would provide a suitable level of diversification capable of generating strong long-term returns, this has not been the case over the last decade.

This AI stock is attracting investors like Michael Bloomberg and Peter Thiel…

Why are these legendary investors, already wealthy beyond imagination, drawn to this opportunity? The allure lies in more than just potential returns; it's a vote of confidence in a company poised for long-term success.

Imagine a revolutionary AI company that's not just participating in the digital media landscape but reshaping it entirely.

Trusted by giants like Amazon, Disney, and Netflix, the company reported nearly £637 million in revenue last year, marking a robust 7.8% growth over three years. Its impressive market reach and spirit of innovation are just the beginning of its story.

Best of all, we’re thrilled to offer you an exclusive glimpse into this game-changing AI investment, absolutely free.

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any 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.

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »