I’ve been looking back at how well some of our top FTSE 100 stocks have done over the last ten years, including the worst recession for many decades.
I’ve only looked at a few winners so far, with ARM Holdings way out in front with a 12-bagger over 10 years.
A loser…
But how about on of our highest-profile losers, Tesco (LSE: TSCO), which shocked the market this week with the revelation that it had overstated its profits for the six months to 23 August by an estimated £250m?
That led to a 12% price fall on the day, taking the shares down 46% over the past 12 months to 203p.
And if that’s not bad enough, the price is even lower today than it was a decade ago — back in September 2004 you’d have had to pay 285p per share, so you’d be down 29%. That means a £10,000 investment in Tesco 10 years ago would be worth only £7,123 today.
Or would it?
Dividends save the day
Actually, once we take into account the dividends Tesco has been paying, things don’t look anywhere near so bad. We’d be down 29% on the share price, but a cumulative £4,227 in dividends would have countered that with a 42% gain.
Overall, that initial £10,000 would today be worth £11,350 — that’s an admittedly unimpressive 11% gain, but at least it’s not a loss.
Now, what about reinvesting dividends? That’s always a good strategy isn’t it? Actually, no, not in this case. Pound cost averaging over the past 10 years would have damaged your returns, as the average price has been significantly higher than it is today.
You’d be £1,257 worse off if you reinvested the cash, with your £10,000 turning into £10,093 for a return of under 1%.
Lessons
What do we learn from this? Two key things, I think.
While it’s a disappointing performance, it’s not the wipeout disaster feared by those who think investing in shares is just too risky. You’d have bought shares in a company whose trading turned sour, and held it through one of the worst stock market decades in recent history — and though you’d have done better sticking the money in the bank, you still wouldn’t have actually lost any.
And then there’s the lesson of diversification. If you spread your investment cash over, say, 10 to 15 stocks, the poor performers like Tesco will be more than compensated for by the winners.
Worse to come
But on a final sombre note, I haven’t looked at the worst performers yet — Lloyds Banking Group and Royal Bank of Scotland are still to come.