Since the inception of index funds, it’s never been easier for investors to mimic the returns of flagship indices like the FTSE 100 and build wealth. This passive approach to the stock market automates a lot of the hard work. And beyond finding the lowest fund fees, there’s little thought needed for portfolio management or stock picking.
But does this approach to investing actually yield meaningful returns? After all, a quick glance at the FTSE 100’s chart doesn’t exactly reveal spectacular returns over the last decade. Let’s take a closer look.
The true returns of the UK’s leading index
Since 2014, the FTSE 100 has climbed from around 6,740 points to 7,460 today. That’s close to an 11% return over a decade, which averages to just a 1.05% annualised gain.
Needless to say, that’s pretty underwhelming. This is especially true when considering that inflation has averaged around 2.5% over the same period. Not to mention that other investment vehicles at the time were offering higher returns at significantly lower risks.
However, this surface-level figure doesn’t paint the whole picture. The index is home to some of the largest enterprises in Britain, and with maturity often comes dividends. And when factoring in these gains, the FTSE 100’s performance suddenly starts to look far more attractive.
The total shareholder returns since the start of 2014 lands closer to 68%, boosting the compounded annualised return to 5.3%. That’s still lower than its long-term historical average of 8%. But it’s worth remembering the last two years haven’t exactly been kind to investors.
Therefore, if I had put £1,000 in a low-cost index fund a decade ago, my investment would be worth around £1,679 today.
Is stock picking the better option?
For the time, a 5.3% gain is fairly respectable, considering the risk-free returns offered by savings accounts were near zero as a result of tiny interest rates. But today, savings accounts are offering considerably more. So much so that it begs the question as to why investors should take on the risks of the stock market for such small returns?
With the launch of a new bull market seemingly on the horizon, I believe there’s a good chance the FTSE 100 will deliver more impressive gains moving forward. But for those seeking maximum growth, owning a broad index may not be the best way to go about it.
By crafting a custom collection of handpicked stocks, investors can position themselves to reap far-chunkier returns. And several stocks from my own portfolio have vastly outperformed the benchmark, with some venturing into triple- or even quadruple-digit returns over a much shorter time horizon!
Of course, this journey has come paired with significantly higher volatility. And not all of my investments panned out the way I hoped. For those who don’t have the stomach for rapid, short-term fluctuations in valuation, this route may not be appropriate. But in my case, it’s led to market-beating returns.
The post How rich would I be if I’d invested £1,000 in a FTSE 100 index fund 10 years ago? appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
