The FTSE 100 Will Always Beat You

On average, the FTSE 100 (INDEXFTSE:UKX) always beats private investors.

| More on:

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.

stock exchangeEvery investor’s goal is to make money and increase their wealth, or at least protect their wealth. However, the majority of private investors fail to accomplish this simple goal. 

Indeed, it’s often said that many private investors underperform the market, although until recently there have been no definitive figures detailing to what degree investors actually underperform. But now we know, and the numbers are terrifying. 

Lagging the index

Over the past 20 years the FTSE 100 has risen at a rate of around 5.4% per annum, excluding fees, dividends and inflation — dividends received are likely to cancel out fees and inflation anyway. During this period, the market has seen the dotcom bubble and the financial crisis: two events that have sent the FTSE 100 surging to a high of nearly 7,000 and crashing to a low of around 3,000. 

In comparison, over the same 20-year period, according to research conducted by a number of financial institutions, the average investor has only returned 2.5% per annum including dividends. This paltry return is, in a word, shocking.

In fact, the average investor underperformed nearly every financial instrument bar one over the 20-year period studied. The only market that put in a worse performance than the average investor over this period was that Japanese stock market. Some of the instruments that performed better than the average investor over the past 20 years include: cash (3% p.a.), bonds (3% – 8% p.a.), hedge funds (8% p.a.), REITS (10% p.a.) and all emerging markets (6% – 10% p.a.).

All in all, if you include inflation, in real terms over the past 20 years the average investor has returned 0% p.a., while the FTSE 100 has returned over 5%. 

Slow and steady

Many analysts agree that the average investor underperforms the market because they trade too much. As a result, fees eat away at returns and many investors often buy high and sell low, erasing much of their capital in the process. 

So, it seems as if the best way to avoid these dismal returns and rack up a performance that is at least in line with the wider market, investors should look to tracker funds. 

It’s easy to see how a simple tracker fund can transform your portfolio. Over the past 29 years, the FTSE 100 has returned around 5.5% per annum, excluding dividends. Meanwhile, the FTSE All-Share has returned closer to 6% per annum. Including dividends these returns would be closer to 10%.

And remember, these returns exclude the impact of dividend reinvestment. According to my figures, a £1000 investment in the FTSE All-share, yielding 3% per annum, with capital growth of 5.9% would turn £1,000 into £8,200 over a period of 30 years.

Of course, this is excluding costs, but there are some very low cost trackers out there for you to take advantage of. In particular, BlackRock 100 UK Equity TrackerFidelity Index UK charges 0.09% and the db x-trackers FTSE 100 UCITS ETF (LSE: XUKX) charges a lowly 0.09%.

For the FTSE All-Share, Vanguard FTSE UK Equity Index charges 0.15%, BlackRock UK Equity Tracker offers index replication for 0.16% and the Legal & General Tracker Trust charges 0.16%.

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »