It might not feel like we are riding the crest of a financial wave just now. Yet this week, the benchmark FTSE 100 index of leading London-listed companies moved above 8,000, before falling back down again.
As I write this on Thursday, it is within 0.5% of its highest-ever closing level.
Could things keep moving up to 9,000 or even 10,000? If so, what does that mean for my investment strategy?
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Onwards and upwards?
Nothing is ever guaranteed in life, except death and taxes.
Having said that, in due course I do expect the FTSE 100 to hit 10,000. When it launched 40 years ago, it stood at 1,000. Since then, it has hit 2,000, 3,000, 4,000, 5,000, 6,000, 7,000 and 8,000.
Past performance is not necessarily a guide to what will happen in future, of course.
In the case of the FTSE 100, though, there is what behavioural psychologists refer to as a survivorship bias. Companies that have falling share prices often see their market capitalisation reduce and later drop out of the index. Meanwhile, they are replaced in the flagship index by companies with growing share prices and increasing market caps.
Sooner or later, therefore, I think 10,000 will be reached.
That could be this year – but it might not be for decades to come. Two of the key determinants will be the overall performance of blue-chip British companies and investor sentiment to the London market.
After all, some businesses have performed well in recent years despite a weak economy, yet subdued investor enthusiasm for UK shares has kept their share prices from rising in line with their business performance.
Over the past five years, to take just one example, FTSE 100 member Associated British Foods grew earnings per share by 5%. But its share price has grown less than 1% in that period.
Buying the index
Given that, over time, I expect the FTSE 100 likely will hit 10,000 (roughly a quarter above its current level) should I just ‘buy the index’ by investing in a share that tracks the index?
I do see some advantages to that approach (one that Warren Buffett has previously suggested could make sense for a lot of private investors).
For example, imagine I decided to buy shares in a tracker fund like ETF HSBC FTSE 100 UCITS (LSE: HUKX).
Buying a FTSE 100 tracker like that would give me diversification. It would let me invest indirectly in dozens of leading UK-listed companies with proven business models and strong profit potential.
I see downsides too, however.
Most tracker funds carry fees. They can look small on an annual basis. But as a long-term investor they could add up. I think the FTSE 100 will hit 10,000 but there is no guarantee and, even if it does, it could take decades.
Also, there are FTSE 100 shares I would not buy individually with my own money. Ocado has a large customer base and impressive fulfilment technology. But it has been a loss-making money pit in recent years – and I fear that could continue.
So rather than buy a share like HSBC FTSE 100 UCITS ETF, I would prefer to choose individual shares for my portfolio. That way, I can focus on what I see as the very strongest investment ideas.
