Can you really make 10% a year from the FTSE 100?

Can you rely on the FTSE 100 index (INDEXFTSE: UKX) to generate returns of 10% per year over the long term?

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.

Financial experts often advise that you can expect to generate returns of around 8-10% per year from the stock market over the long term. But is that kind of return achievable by investing in a simple FTSE 100 index tracker which tracks the performance of the UK’s largest 100 companies? Let’s take a closer look.

10-year return

It’s fair to say that an investment time horizon of 10 years or more can be classified as ‘long-term’ investing. So let’s analyse the total returns from the FTSE 100 over the decade-long period to the end of 2017. The table below shows annual total returns from the start of 2008 to the end of 2017.

FTSE 100 annual total returns 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-28.3% 27.3% 12.6% -2.2% 10.0% 18.7% 0.7% -1.3% 19.1% 11.9%

Source: FTSE Russell 

Looking at the annual returns over that period, we can see that the index had some good years, some average years and one terrible year.

For example in 2008, we had the Global Financial Crisis (GFC) and the FTSE 100 returned -28.3% for the year. £10,000 invested at the start of 2008 would have been worth just £7,170 by the end of the year.

On the other hand, over the 10-year period there were three years where the index performed particularly well, returning 27.3%, 18.7% and 19.1% in 2009, 2013 and 2016, respectively.

Overall however, for the total period to the end of 2017, the FTSE 100 index generated a total return for investors of 74%. While that’s not a terrible return, it’s not overly impressive either. On an annualised basis, that equates to a return of just 5.7%. That’s significantly below the 8-10% return that many investors were probably expecting.

Now, obviously, that’s just one 10-year period in history. And the returns for this were dragged down significantly by the performance of global markets during the GFC. A market event like that doesn’t come along very often. Yet the key takeaway here, in my opinion, is that investors shouldn’t bank on the FTSE 100 returning 8%-10% per year. It may return this figure over some time periods, but at other times it may underperform. So how can investors improve their returns?

Higher returns

One option is to consider adding exposure to faster-growing mid-cap stocks through the FTSE 250. This index holds the 250 largest companies outside the FTSE 100. Its 10-year performance is shown below.

FTSE 250 annual total returns 

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-38.2% 50.6% 27.4% -10.1% 26.1% 32.3% 3.7% 11.2% 6.7% 17.8%

Source: FTSE Russell 

While this index did fall harder than the FTSE 100 in 2008, it also rebounded more powerfully in 2009. It has also generated some fantastic performances over the decade, returning over 25% annually on four separate occasions. Even with the big fall in 2008, the index generated a total return of 158% for the 10-year period which, on an annualised basis, equates to an excellent return of 9.9% per year. That’s significantly higher than the return from the FTSE 100 over the same period.

The lesson here is that if you’re looking to achieve strong long-term returns from the stock market, don’t limit your exposure to the FTSE 100. Consider adding FTSE 250 stocks to your portfolio if you’re looking to generate returns of 8%-10% per year from the stock market over the long run.

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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »