Should I keep investing in the FTSE 100?

I am happy to keep investing in the FTSE 100, but I am aware of its strengths and weaknesses, and I also look elsewhere.

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.

Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

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.

The news is full of stories of Inflation, rate rises, strikes, and failing companies blighting the UK economy. I have seen the UK described as a basket case, and by extension the UK stock market. Now, whether the UK economy is doomed or not is irrelevant to the point I want to make. That is a stock market or market index is not necessarily the same thing as its country’s economy. That is particularly true of the FTSE 100 index, which I am still happy to keep investing in.

FTSE 100 near its all-time high

The FTSE 100 hit 7,877.45 points on 19 June 2019. As it stands that is its record high. Right now, the index is just below that, at 7,764 points, but it has been close this week. Flirting with all-time highs suggests that the index, and by extension the companies whose stocks make it up, are doing okay. How can that be if the UK economy is apparently in the doldrums? Well, about three-quarters of the revenues of FTSE 100 companies come from outside the UK.

There are variations across the 100 or so among companies in the index. AstraZeneca gets about a tenth of its revenues in the UK. NatWest on the other hand gets about 95% of its revenue on these shores. A lot of FTSE 100 companies report in sterling. Therefore, exchange rate movements will affect their foreign earnings and thus their share prices. And an awful UK economy is definitely not a good thing for the FTSE 100, but on the whole, in terms of revenue generation, its fortunes should depend more on what’s going on in the rest of the world, rather than what’s happening in the UK.

Underperforming index

Since March 2016, the FTSE 100 has underperformed the US S&P 500, the German Dax, and the Japanese Nikkei 225. The performance lag was especially pronounced in the boom after the coronavirus global market crash in early 2020. Now, one interpretation of the underperformance is that the UK economy, particularly the effect of Brexit, has been holding the index back. But, looking more closely, it seems that the FTSE 100 held up fairly well while other indexes started to slide in late 2021 and into 2022.

Line graphs of the FTSE 100 and other indexes price changes rebased to 100 in March 2016 showing that the FTSE 100 has underperformed since that date.

I think that has got a lot to do with the makeup of the index. It is important to know what you are buying. The FTSE 100 is heavily weighted towards the financial, consumer defensive, and basic materials (mining) industries and is a value-orientated index. It is short on growth stocks and technology names in particular.

Being light on growth has been a benefit of late. But that will probably not always be the case. So while I am happy to keep investing in the FTSE 100, in the form of individual stock picks in my Stocks and Shares ISA, and through a tracker in my SIPP, I do recognise its strengths and weaknesses. Investing in it does give me exposure to the global economy, but mainly in a few, what might be called old-world industries. That’s not enough diversification for my stock portfolio, so I am happy to look outside the index as well.

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.

James McCombie has positions in NatWest Group Plc. 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

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »

Investing Articles

Is Helium One an amazing penny stock bargain for 2025?

Our writer considers whether to invest in a penny stock that’s recently discovered gas and is now seeking to commercialise…

Read more »

Investing Articles

Here are the 10 BIGGEST investments in Warren Buffett’s portfolio

Almost 90% of Warren Buffett's Berkshire Hathaway portfolio is invested in just 10 stocks. Zaven Boyrazian explores his highest-conviction ideas.

Read more »

Investing Articles

Here’s the stunning BP share price forecast for 2025

The BP share price enters 2025 in poor shape, after a tricky year for energy stocks. Harvey Jones looks at…

Read more »

Investing Articles

How to target a £100,000 second income starting with just £1,000

Zaven Boyrazian explains the various strategies investors can use to try and earn a £100,000 second income in the stock…

Read more »

Investing Articles

My 5 BIGGEST Stocks and Shares ISA investments for 2025 and beyond

Zaven Boyrazian shares his largest Stocks and Shares ISA investments made this year. Each has explosive growth potential, but they…

Read more »