It’s easy to say we should just keep on buying shares through good times and bad. But we’ve had five years now of the FTSE 100 going nowhere, and people’s fears that they’re wasting their time and money really are genuine.
I think there are two main reasons why we shouldn’t panic, and why we really are in a good time to buy shares today.
At the time of writing, the FTSE 100 is almost exactly unmoved from where it was five years ago. It crashed when the pandemic hit, but the subsequent recovery has now regained all of that fall. It’s still a zero result though, isn’t it?
Well, no. The headline Footsie chart ignores one key thing, and that’s dividends. Those were hit by the Covid-19 crisis, but only really for one year. The top index has otherwise produced dividend yields of around 4% per year in recent years.
Dividends beat savings
So FTSE 100 dividends have provided investors with better returns than a savings account. But those who invested regularly throughout the period could actually be sitting on some nice capital gains too. Here’s how that works…
Suppose I’d invested half my money in a FTSE 100 tracker five years ago. And then I was lucky with my timing and piled in with the second half just at the low point of the pandemic crash.
My first investment would have fallen in value, then recovered, and today would be back where it started. But the second investment, at much lower prices, would have risen considerably in value. Overall, I’d be sitting on a nice gain.
That’s a cherry-picked example of perfect timing, but we don’t actually need that. If we invest in the FTSE 100 regularly through a dip and then a subsequent recovery, we’ll end up with more shares for the same money than if the index had remained perfectly flat.
Long-term
That brings me to the other main key to investing the way we like to do it here at The Motley Fool. Five years might seem like a long time if our shares are performing poorly. But it really doesn’t hit what we mean by long-term investing.
Over five-year periods, the FTSE 100 does quite often perform poorly. Even over 10-year periods, we should still expect to see the occasional underperformance.
According to studies done by Barclays, the UK stock market has beaten other forms of investing in about 80% of all rolling 10-year periods for around the past 120 years. That includes the great depression and two world wars.
That’s not bad, but it does mean we should expect underperformance in around 20% of 10-year periods. But over 23-year periods, shares have historically beaten cash in the bank every single time.
Key lessons
I take two key lessons from this. One is that investors with a truly long-term approach are very likely to do well investing in FTSE 100 shares, whatever the economic conditions.
And the best times to invest are the tough times when markets are down, because that’s when we get more shares for our money.
