The FTSE 100 has risen from 1,000 points to its current price level of around 6,600 points since it was established in January 1984. As such, an investor who bought and held a diverse range of companies from the index could realistically have doubled their investment in large-cap stocks.
Of course, there is no guarantee that the index will rise at all in future. It may spend the next decade at a lower price than where it trades today. However, its track record, low valuations across the index and the potential for compounding suggest otherwise. It means an investment made today could realistically double over the long run in a bull market.
A 100% return from the FTSE 100
The FTSE 100 has recorded annual capital growth of around 5% over the last 37 years. But its total returns are significantly higher when dividends are added. In fact, their reinvestment has been a large part of the total returns of UK shares in recent decades. They have turned mid-single-digit annual returns into high-single digit compounded returns.
As mentioned, there is no guarantee that a similar level of return will be achieved in future. The future never mirrors the past, of course. However, the past performance of the index suggests that it has the capacity to produce new record highs after the 2020 stock market crash. It has always been able to achieve this goal in the past – even after its very worst crashes and bear markets.
For illustration purposes, I will assume it does follow a similar return profile in future as it has done in the past. This means an investment made today could realistically produce 100% returns within a decade. As such, this could be significantly ahead of the returns of other mainstream assets over the same time period that have lower yields or higher prices than many large-cap shares.
Managing a portfolio of UK shares
Clearly, the FTSE 100 is far riskier than other popular assets such as cash and bonds. Therefore, it is imperative to diversify across a broad range of companies to reduce company-specific risk. So, too, is ensuring that only amounts of capital that are not required for everyday spending are invested in shares. Otherwise, they may need to be sold to cover expenses during what could prove to be a challenging economic period.
Of course, the stock market’s past returns have not been linear. They have been hugely volatile at times – as the last year has shown. More ups and downs are likely in the coming years, as the economic uncertainty currently present plays out. However, history suggests that buying a broad range of large-cap shares and holding them for the long run has been a successful means of generating relatively attractive returns. This theme may continue after what has been a tough period for the stock market.