We’ve been asked this a lot recently. Given the strong performance of the FTSE 100, everyday investors are wondering why the gains aren’t arriving at their door.
What is (and isn’t) the FTSE 100?
The FTSE 100 is an index of the biggest 100 companies in the UK stock market. Think Barclays, Shell, BAE, Tesco, Vodafone, AstraZeneca, BT, Diageo, Rolls Royce …
It’s probably the index most regularly associated with UK economic performance. We see it on TV, in the news, on our phones …
Many people think the performance of their investments should match the performance of the FTSE 100, but you can’t compare apples with Monster Munch.
How so?
Sectors such as healthcare, oil and energy, which are well-represented in the FTSE 100, did ludicrously well in 2022, but their performance was not typical in a year defined by volatility, struggles, inflation and high consumer prices in the UK and around the world.
Bear in mind that the UK’s top 100 companies are global players. They generate roughly three-quarters of their earnings overseas and many do business in dollars, which was a big advantage in 2022 when the pound hit sore new lows.
We need also remember that the UK makes up ~6% of global markets. The FTSE 100 is one index from one country so it’s is a tiny lens through which to evaluate the performance of a global economy, and the world’s investment markets.
How do my investments figure in?
One of the core principles of investing is to diversify. A good strategy is to invest across a broad mix of shares in different companies, territories, indexes and instruments.
Stick to that and by definition you probably won’t be too heavily invested in any one place. Hence why a high-performing FTSE 100 won’t necessarily reflect in your portfolio.
It’s best-practice to diversify investments. It’s the established way to see consistent, long term returns, but it inevitably means that — at any one time — some of your investments are up, some are static, and some are down.
Investing for good
“One of the central principles of investing is to own a lot of different investments which don’t resemble each other. In fact, the less they resemble each other, the better … the more likely the portfolio should prove to be a reliable, all-weather vehicle.”
~ Brian Portnoy, The Geometry of Wealth
Investments go through ups and downs but they have the best chance of performing if you stay loyal to a diversified portfolio and set your sights on the long term. Performance data over time proves that theory.
Right now, some professional investors predict change ahead in investment markets, but it’s all highly dependent on interest rates, western economies’ resilience, China’s reopening, and how investor morale responds to all of the above.
Questions? Keep ’em coming
It might seem that a high-flying FTSE 100 is cause for celebration, but it’s just one small part of a hugely complicated investment landscape which relies (for better or worse ) on a global economy going through major transition.
All we know is that the golden rules of investing still stand: invest for the long term, diversify, and don’t try to time the market. The only thing we know about the future … is that we know almost nothing.
We write extensively on this in the Money Means Book (available now) and if you’re concerned about the performance of your investment fund then speak with a financial advisor.