When we invest in shares, we do so in the hope that their value will go up over the long term. Today, the FTSE 100‘s 15-year record makes that hope look forlorn. But is it really?
Back in December 1999, the FTSE finished the day at its highest ever closing level of 6,930 points. Since then it has come close a couple of times, but as I write today the index of the UK’s biggest stocks stands at 6,563 — still a full 367 points short of that record.
But you really shouldn’t have been surprised by such a fall, and if you’ve been investing sensibly you’ll still have done well.
Barclays Equity Gilt Study
The folks at Barclays have been publishing their annual Equity Gilt study every year since 1956, analysing investment trends since 1899 — and every year it provides statistics comparing equities (shares), gilts (government bonds) and cash.
Cash comes nowhere near the other two. And while gilts are less volatile, they don’t approach the returns we can get from shares.
In fact, over rolling 10-year periods, shares have beaten gilts 79% of the time. And over 18-year periods the success rate climbs to 88%.
The converse is that shares will underperform over 10-year periods 21% of the time, and 12% of the time over 18-year periods. And that’s why we should not have been surprised by the 15-year fall in the value of FTSE 100 shares — during a lifelong investment timescale, it’s almost inevitable that you’ll experience at least one such period.
Still profitable
The surprising thing is, if you’d invested sensibly you’d still be nicely in profit.
If you’d gambled all your worldly worth on that one fateful day at the end of 1999, just before the dot com bubble burst and before we were plunged into Gulf Wars followed by the banking crisis and the worst recession in decades, and you didn’t invest a penny before or since — well, that would have been unlucky timing.
But if you’ve been squirreling away your savings regularly over a long period, you’ll have bought more shares during the downturns and fewer at the peaks. And once dividend income is included, you’ll have come out ahead — even during such a torrid period.
Over the past 10 years, according to Barclays, shares would have given you an annualised real return of 5.5% per year compared to only 2.5% for gilts. And over 20 years you’d have had 4.1% per year compared to 3.5% — not a great outperformance, but if that includes one of the worst periods for shares in living memory then it’s still been a good time for shares!
It’s dividends that make all the difference. £100 invested in shares in 1899 would be worth only £191 today in real terms purely on share prices — but with dividends reinvested it would have soared to £28,386!
How to win
The way to beat the dips is clear. Make regular small investments rather than one big one, diversify your portfolio to include some safe dividend stocks, reinvest your dividends — and above all else, stick with it for the long term.