Investors often think of the blue-chip FTSE 100 index of leading shares as staid, if not dull.
But over the past five years, the index has moved up by 60%.
That is pretty racy growth for a collection of businesses some of which – like Legal & General – were in operation before Queen Victoria ascended to the throne.
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What is going on?
Mature markets are not always calm
If you cast your mind back to where you were and what you were doing five years ago, then things may become more obvious.
That March, markets had crashed as the global pandemic took hold. So looking at the past five years flatters the long-term performance of the FTSE 100 due to an abnormally low baseline.
If we extended the timeframe just a couple of months longer, to January 2020, the growth would have been only 13% until now. That is still growth – but a long way short of 60%!
Still, I think there is a valuable lesson here from which an investor can possibly profit. Even a staid-seeming index of mature businesses can see its price swing wildly within a fairly small timeframe.
Buying when the market is racked with doubt
It takes a brave investor to wade into markets when hordes of people are selling.
Sometimes, a crash can be overdone. But for some shares, a price crash is highly rational, as the market is assessing the possible future impact on its business of whatever has precipitated a sudden market downturn.
Take Saga as an example. Its share price began 2020 at over £7. As the market realised that pandemic-inspired travel restrictions could be catastrophic for a company selling cruises to pensioners, the share fell closer to £2 in March 2020. Today, though, it is even lower.
So, buying in a market crash can be like trying to catch a falling knife. No matter how low a share price (any share price) goes, it can always go lower.
But moments of market frenzy can also throw up great bargains.
18%+ yield from a FTSE share
Today, FTSE 100 asset manager M&G (LSE: MNG) has a yield of 9.2%. That is very appealing to me — among the highest in the index.
Just under five years ago, though, the M&G share price had collapsed to around 51% of its current level. Not only does that mean that someone investing then would now almost have doubled their money (on paper), but they would also be earning an annual dividend yield of over 18%.
For a blue-chip FTSE firm that has a policy of maintaining or raising its dividend per share annually, an 18% yield is amazing.
Of course, dividends are never guaranteed and we will find out this Wednesday (19 March), when M&G releases its 2024 results, whether the dividend has grown further.
Just as in 2020, there are risks for the asset manager. In the first half, clients withdrew more funds from the core business than they put in. If that continues, it could hurt profits.
Still, for a proven business with millions of customers, M&G’s share price five years ago looks like a bargain today!
Yes, that is the benefit of hindsight.
But it also explains why I am making a list of FTSE shares now I would like to snap up if another market crash sends them sinking!
