FTSE 100 "a pretty rubbish investment", change my mind

[reddog]

Back when I read physical newspapers in the 90s - mid 2000s, I would regularly read the Sunday Times "Money" section.

 

Every few months they would basically write the same article, about how the stock market was the best investment ever, and if you had put £100 into the British stock market say 50 years ago, or whatever, you would now be a millionaire by now - you get the jist.

 

I took this advice and loaded up on a few ISAs in the ftse 100 in the mid 2000s.

 

The problem is, when I started work in 1999 the ftse was about 6500, 20 of years later it is hovering around 6000.

 

You could say ah, but you can get a 4-5% yield.  To which I would say, you used to be able to get that from a bog standard savings account.

 

I should have ignored the Sunday Times Money section, and just loaded up on gold from 1999 onwards, which is advice I never saw them giving!!

[AndyFTB]

Anything, literally anything, can be both a good investment and also a bad investment depending on the time you enter and exit.  Name anything and I will give you dates that make it both, FTSE, Oil, Gold, Bitcoin... you name it!

The FTSE does appear to be a bit of a lame duck though yes, but as you suggest with reinvested dividends it should still have shown growth.

[Kosmin]

6 minutes ago, reddog said:

Every few months they would basically write the same article, about how the stock market was the best investment ever, and if you had put £100 into the British stock market say 50 years ago, or whatever, you would now be a millionaire by now - you get the jist.

There are several claims here:

1) Stock markets are the best asset class (risk-adjusted returns will be higher than alternatives)

True. Over the long run returns are much higher.

2) Domestic stock markets are the best asset class (as good as, or better than foreign stock markets)

False. Most foreign countries have outperformed the UK stock markets.

3) Stock market returns will continue to be high

Mixed. I think they have been a bit lower than previous decades, though world average returns are helped by the high US returns.

4) Domestic stock returns will continue to be high

False. As you note FTSE 100 has provided no capital growth in 20 years, so the return is only the dividend.

 

Overall the advice in the articles you read was correct. But they should have clarified that you should diversify, buying foreign stocks as well. They were also wrong to claim that future returns would be at the same level of the recent history.

17 minutes ago, reddog said:

The problem is, when I started work in 1999 the ftse was about 6500, 20 of years later it is hovering around 6000.

 

You could say ah, but you can get a 4-5% yield.  To which I would say, you used to be able to get that from a bog standard savings account.

This isn't a meaningful comparison. The expected return on any risky asset is the risk free return plus extra compensation for holding a risky asset. So when you can get 5% risk free in the bank, it's unsurprising you can expect 10% return in equities. When the risk free rate is close to 0%, it's unsurprising if the expected return on equities is 5%.

[scottbeard]

24 minutes ago, reddog said:

The problem is, when I started work in 1999 the ftse was about 6500, 20 of years later it is hovering around 6000.

The problem is, your term of reference.

In 1999 the FTSE 100 was at the top of a massive bubble.

Obviously if you compare how it's done since the top of that bubble to today, when there's been one of the biggest ever crashes, it won't look good.

However, I wouldn't invest in the FTSE 100 myself - I tend to invest in the All Share, or in actively managed funds.  The FTSE 100 contains too many past-mature businesses who are going to go down, or decent businesses that have been bid up to high levels.  You want to invest in the long term in shares that have decent yields and decent long-term prospects.  However, I can't pick them myself - hence going passive or delegating to an active manager via actively managed funds.

[scottbeard]

29 minutes ago, reddog said:

You could say ah, but you can get a 4-5% yield.  To which I would say, you used to be able to get that from a bog standard savings account.

Indeed.  But you can't now.  One of several reasons which make equities more attractive over the next 20 years.

[ebull]

How does this FTSE long term valuation comparison cope with the fact that the shares that make up the FTSE100 will differ quite a bit to what they were 20 years ago?

Guessing they assume you sell on the day they drop out [when presumably they have just crashed and are crashing worse due to exiting the index], then buy the new ones on that day too [which will be on an upwards move and everyone will be doing the same that week which pushes them up more].

Is that correct?

Since these changes are predictable [I am assuming the biggest totals make up the 100] , are there funds that sell and buy a month before the change?

Finally is there somewhere that looks at the FTSE100 components of 20 years ago and works out what THEY would be worth now if you'd just bought and held? Presumably lots less?

Edited March 9, 2020 by ebull
typo

[Orb]

42 minutes ago, scottbeard said:

The problem is, your term of reference.

In 1999 the FTSE 100 was at the top of a massive bubble.

Obviously if you compare how it's done since the top of that bubble to today, when there's been one of the biggest ever crashes, it won't look good.

However, I wouldn't invest in the FTSE 100 myself - I tend to invest in the All Share, or in actively managed funds.  The FTSE 100 contains too many past-mature businesses who are going to go down, or decent businesses that have been bid up to high levels.  You want to invest in the long term in shares that have decent yields and decent long-term prospects.  However, I can't pick them myself - hence going passive or delegating to an active manager via actively managed funds.

Have you any specific suggestions for passive funds? I'll be looking at passive funds very soon, and was thinking of getting a simple index tracker, especially during this crash. But I'm not a seasoned investor, and I'm not entirely convinced of a FTSE100 tracker for the reason you state. 

[AndyFTB]

I have used these before, a long time ago and then it tracked the FTSE 100 not the 600, but...

The fee is very low, it allows for dividends to be reinvested every 6 months or you can draw an income. 

https://uk.virginmoney.com/virgin/unit-trusts/ftse/

Look into whether you can hold this in an ISA, you should be able to, if you can not though you would probably not want this but look for something which can be.

[hurlerontheditch]

look at the Nasdaq and then look at the FTSE. why would you have invested all in Ftse. 

 

[scottbeard]

4 hours ago, Orb said:

Have you any specific suggestions for passive funds? I'll be looking at passive funds very soon, and was thinking of getting a simple index tracker, especially during this crash. But I'm not a seasoned investor, and I'm not entirely convinced of a FTSE100 tracker for the reason you state. 

I can’t really answer that without giving financial advice that I’m not authorised to give!

Most investment platforms will offer lots of straightforward trackers that are likely to be suitable. 

[Kosmin]

5 hours ago, ebull said:

How does this FTSE long term valuation comparison cope with the fact that the shares that make up the FTSE100 will differ quite a bit to what they were 20 years ago?

The FTSE 100 is reviewed quarterly. I'm not sure if promotion/relegation is simply a mechanical comparison of market cap. Index trackers change to reflect the change of the index.

It may not differ as much as you think. There will be a lot more change at the bottom, which is a much smaller proportion of the market cap.

https://lsemarketcap.com/

Top 11 are all more than 50bn (and probably worth about half of the FTSE100 total)

Bottom 25 or so are all less than 5bn. Smallest is 2bn (about 0.1% of FTSE100)

So if a few at the bottom change it amounts to a very small amount of the portfolio.

6 hours ago, ebull said:

Guessing they assume you sell on the day they drop out [when presumably they have just crashed and are crashing worse due to exiting the index], then buy the new ones on that day too [which will be on an upwards move and everyone will be doing the same that week which pushes them up more].

Is that correct?

This happens, but I don't think the impact is necessarily very big. I would have thought those are on a clear path, rising/falling rapidly are less common than those which hover around the boundary and may be relegated and promoted several times.

Index trackers don't typically fully replicate the index. It would be too costly buy/sell proportionately every day when there are fund inflows/outflows or when relative proportions of the index change significantly. Sometimes they don't hold a share if it is closely correlated to another one. So perhaps some trackers won't hold some of the shares at the bottom.

6 hours ago, ebull said:

Since these changes are predictable [I am assuming the biggest totals make up the 100] , are there funds that sell and buy a month before the change?

Some of the changes in the composition are highly probable. But when you decide it's probable, how do you know if other funds have already come to this conclusion and traded accordingly? How do you know the price hasn't over-reacted? How do you know some unexpected factor won't happen, which outweighs the element you think you can predict?

6 hours ago, ebull said:

How does this FTSE long term valuation comparison cope with the fact that the shares that make up the FTSE100 will differ quite a bit to what they were 20 years ago?

I've wondered this myself. I thought: "Is an index which re-adjusts quarterly really passive? Isn't a true passive investment just buy and hold?"

But I don't think it would be very different. Someone noted in another thread (probably the Dow one) that only something like 22-24 of the original constituents are still in the FTSE 100, but I think this is because many have merged or acquired.

See https://en.wikipedia.org/wiki/FTSE_100_Index#Past_constituents

Many in this list mention a merger or acquisition and fewer say removed as market cap fell too low.

 

[Kosmin]

6 hours ago, scottbeard said:

However, I wouldn't invest in the FTSE 100 myself - I tend to invest in the All Share, or in actively managed funds.  The FTSE 100 contains too many past-mature businesses who are going to go down, or decent businesses that have been bid up to high levels.  You want to invest in the long term in shares that have decent yields and decent long-term prospects.  However, I can't pick them myself - hence going passive or delegating to an active manager via actively managed funds.

The FTSE 100 is 80% of the All Share, so you aren't getting a very different outcome. You might be better off investing in FTSE 250 tracker instead (that's based on the 101st to the 350th largest, not the top 250 - just in case anyone wondered) and/or a small cap tracker.

[scottbeard]

6 minutes ago, Kosmin said:

The FTSE 100 is 80% of the All Share, so you aren't getting a very different outcome. You might be better off investing in FTSE 250 tracker instead (that's based on the 101st to the 350th largest, not the top 250 - just in case anyone wondered) and/or a small cap tracker.

Good point.  I do also invest in some mid-cap index funds, but you're right - overall I'm probably more invested in the 100 than I really want to be.  Thanks.

[Loving The Crash]

17 hours ago, reddog said:

The problem is, when I started work in 1999 the ftse was about 6500, 20 of years later it is hovering around 6000.

 

You could say ah, but you can get a 4-5% yield.  To which I would say, you used to be able to get that from a bog standard savings account.

 

I should have ignored the Sunday Times Money section, and just loaded up on gold from 1999 onwards, which is advice I never saw them giving!!

Don't forget 20 years of inflation - the FTSE has lost about a third in real terms over that period...

[scottbeard]

13 minutes ago, Loving The Crash said:

Don't forget 20 years of inflation - the FTSE has lost about a third in real terms over that period...

Also don't forget 20 years of dividends

[Fatmanfilms]

16 hours ago, Orb said:

Have you any specific suggestions for passive funds? I'll be looking at passive funds very soon, and was thinking of getting a simple index tracker, especially during this crash. But I'm not a seasoned investor, and I'm not entirely convinced of a FTSE100 tracker for the reason you state. 

Not passive, I have been an investor in www.fundsmith.co.uk for over 7 years, my first investments have tippled, it's a good strategy I have followed Terry Smith for nearly 30 years

[micawber]

1 hour ago, scottbeard said:

Also don't forget 20 years of dividends

Absolutely. The FTSE100 index 'value' is pretty much irrelevant. As I posted on another topic

How to interpret FTSE 100 total returns data

Because of the distortive impact of high inflation, it makes most sense to look at inflation-adjusted ('real') returns over longer time periods. Over the last 119 years UK equities have made annualised returns of +4.9% over and above inflation.¹ Therefore, if you think inflation will be 2.5% on an ongoing basis, you might expect your long-term returns to be around 7.5%.

This number masks significant swings in asset values. Over ten-year periods equities have made as much as an annualised +12.4% to -3.5% a year after inflation.

As an investor, making money from the FTSE 100 is dependent on capital returns from share price appreciation and income returns from dividends. Reinvesting dividends is the key to long-term wealth.

For example, the FTSE 100 index closed -2.9% lower in December 2018 than it did in December 1999 – but if you include reinvested dividends, investors would have seen returns of +81.3% over the 19-year period. This is an annual return of 3.18%.

[scottbeard]

Indeed.  And all the FTSE-dissing focuses on returns since the December 1999 peak. In reality people don’t invest everything in one month and then nothing for 20 years.  People investing in pensions say do so monthly over a long period, and over most periods see a reasonable (if unspectacular) return.

Saying “the FTSEs return from day X to day Y was rubbish, so it’s a rubbish investment, period ” is bad analysis.

[Dorkins]

The fact that most British people are obsessed by property and not shares makes life easy for contrarian investors.

[xiox]

19 hours ago, Orb said:

Have you any specific suggestions for passive funds? I'll be looking at passive funds very soon, and was thinking of getting a simple index tracker, especially during this crash. But I'm not a seasoned investor, and I'm not entirely convinced of a FTSE100 tracker for the reason you state. 

Have a look at https://monevator.com/ - they have price comparisons and some reading. I hold an HSBC MSCI All World tracker ETF, though this index does have a lot of US exposure. Vanguard are popular and have a lot of different cheap ETFs. They also have products which give you a fixed mixture of shares and bonds, to avoid the work of rebalancing.

[Loving The Crash]

4 hours ago, scottbeard said:

Also don't forget 20 years of dividends

I don't believe the OP forgot dividends...

[reddog]

5 hours ago, Loving The Crash said:

Don't forget 20 years of inflation - the FTSE has lost about a third in real terms over that period...

thanks for depressing me further!  I guess, considering fees, inflation and dividends I have just retained my purchasing power.

 

Agree, it is important to drip feed your money into the market. I didn't start buying until 2006, but I did have some good years around the time of the financial crisis.

 

Also worth noting that most of the froth getting the FTSE up to 7800 in recent years was due to the currency devaluation following Brexit (not a political point, I am a Brexiteer)

[iamnumerate]

3 hours ago, Dorkins said:

The fact that most British people are obsessed by property and not shares makes life easy for contrarian investors.

I think people are obsessed by property because they (wrongly IMHO) think it is safer than shares.