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 becoming a digital juggernaut in a £ 12.5 billion market!

🤖 Curious about the next big player in AI? 🤖

Our leading industry analysts have uncovered a trailblazing content platform that's revolutionising the industry with its unparalleled generative AI technology, setting new standards in creativity and efficiency.

Care for a sneak peek?

Trusted by global giants like Amazon, Disney, and Netflix, this innovative company is not just transforming digital media with AI-generated 3D content but is also capturing a significant share of a £12.7 billion market!

With a remarkable 62% gross margin, indicating exceptional profitability and operational efficiency, this company's growth trajectory positions it as a must-watch for savvy investors.

Best of all, we're offering exclusive access to the name of this game-changing stock, absolutely free!

Discover 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

Senior woman potting plant in garden at home
Investing Articles

Why I prefer investing with Warren Buffett to a FTSE 100 or S&P 500 tracker

When it comes to buying shares, ignoring advice from Warren Buffett is rarely a good idea. But our author thinks…

Read more »

Investing Articles

Forget gold! I prefer UK shares for trying to build long-term wealth

Stock market volatility has sent investors running to safe-haven assets. But for building wealth over time, Stephen Wright prefers UK…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

This S&P 500 stock looks crazily mispriced to me

After hitting a record high on 4 February, this S&P 500 stock crashed hard during the 'Trump slump'. But even…

Read more »

Investing Articles

Meet the FTSE 100 share I’m happy to own, even during the next recession

This FTSE 100 giant was founded in 1929, just before the Great Depression devastated the global economy. Today, it is…

Read more »

Investing Articles

£10,000 invested in NatWest shares 10 years ago is now worth this much

NatWest shares have surged over the past year, but the last decade hasn’t been overly kind to the bank and…

Read more »

Investing Articles

Is Nvidia stock undervalued? Here’s what the charts say

Nvidia stock has slumped on the back of technological developments out of China and Trump’s trade policy. Dr James Fox…

Read more »

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »