If there is one thing that can be guaranteed in the world of investing, it is that things will change. No matter how dependable forecasts have been in the past, they will not be 100% accurate in future and, while the current drivers of the economy may seem fairly settled, in the coming years they will turn out differently than is currently being anticipated.
Inflation protection
This is highly relevant when it comes to interest rates. At the present time, inflation is exceptionally low and, as a result, it is extremely difficult for the Bank of England to do anything but maintain a loose monetary policy. However, with the economy constantly improving, it is very likely that inflation will increase significantly over the coming years and, as history tells us, this can be a problem for many investors. For example, the value of cash balances is eroded and bond coupon payments are worth less in real terms.
However, rising inflation is unlikely to be a major problem for investors in the FTSE 100. That’s because a great deal of companies are able to pass higher levels of inflation onto their customers and maintain current levels of profitability in real terms. In fact, shares are one of the most effective hedges against higher inflation, with dividend rises also likely to beat increases in the price level in the long run, too.
Excellent Risk/Return Opportunity
Furthermore, the FTSE 100 offers unrivalled total return potential given the level of risk being taken. Certainly, borrowing up to 100% of a property’s purchase price on a low interest rate and generating a return for no investment via buy-to-let may provide a higher percentage return than shares, but increasing your leverage comes with a multitude of risks including interest rate risk and liquidity risk.
Investing in the FTSE 100, of course, is not risk-free, but the maximum loss you can record is equal to the total amount invested. And, according to historical returns, the index offers an excellent return which has averaged 6.25% per annum plus around 3.5% per annum in dividends since the FTSE 100 was established in 1984. This works out at a total return of just under 10% per annum and, while there will inevitably be fluctuations in its performance, it remains the top performing major asset class available to UK individuals over the long run.
Appealing Logistics
While buying bonds, buying properties and lending to your peers takes effort, investing in the FTSE 100 is very, very easy. Opening an account with a sharedealing service is simple and straightforward, while for those individuals who want the minimum amount of effort, FTSE 100 tracker funds offer low charges and the opportunity to invest a set amount each month through direct debits. And, with the FTSE 100 being one of the major indices in the world, liquidity is superb and the bid/offer spread of its constituents is kept to a minimum.
Clearly, other asset classes also have their own appeal, but for long term investors who want to own an asset that offers excellent total returns for an acceptable level of risk, has considerable ease of use and impressive protection against rising inflation, the FTSE 100 appears to be the best option.