If you have a long-term investing horizon in mind I think there’s a good chance that investing regularly in an accumulation FTSE 100 index tracker fund will give you a better total return than investing money in an interest-paying bank account.
The ‘accumulation’ part of the description means that the dividends you earn from the fund are automatically reinvested back into the fund. If you reinvest your dividends like that, you’ll be on the road to compounding your money, and compounding is key to building wealth.
Smoothing out some of the ups and downs
Right now, the FTSE 100 has a dividend yield running above 4%, which is a better return than many bank accounts pay in interest. That’s a good start. But the value of your invested money will go up and down with the value of the index as the 100 or so shares making up the index fluctuate.
But if you invest, say, £100 every month, you’ll be able to smooth out some of the volatility because of pound/cost averaging. In other words, when the index cycles down, you’ll be getting more for your money, and when the index cycles up, you won’t be investing all your money near the highs.
Over the long haul, I think your FTSE 100 investment could do well. For example, even in the 10-year period between 2008 and 2017 when there was a lot of volatility in the FTSE 100, it delivered a total return of 74%, which works out at 5.7% a year, beating most bank accounts hands down.
The total returns over the period looked like this:
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
(28.3%) |
27.3% |
12.6% |
(2.2%) |
10% |
18.7% |
0.7% |
(1.3%) |
19.1% |
11.9% |
The figures in brackets represent a negative return during the year, so the volatility looks frightening. But even though the index lurched through last decade’s credit-crunch, it still managed that 74% total return over 10 years. Imagine how good the total returns might be if things go well.
The next 10 years could be even better
In the past, the FTSE 100 has trebled in value over a 10-year period and some believe it could do so again. I think the theory is attractive because it makes sense to me that we could be entering a new period of prosperity and economic growth after what has been a long period of economic recovery since the financial crisis around 2008/9.
Imagine what your FTSE 100 investment could look like if the index trebles in value and you’ve compounded your gains along the way by reinvesting the dividends in an accumulation fund.
However, even if the FTSE 100 falls short of that kind of performance in the years to come, I think that the twin weapons of compounding and pound/cost averaging could work to drive a decent investing return if you make regular payments into a tracker fund.
With a 10-year-plus investment time horizon in mind, I reckon it’s always a great time to drip £100 a month into the FTSE 100.