Principles of Successful Investing – take the long view

12th November 2014

Early in September, the FTSE 100 reached its highest level since December 1999. People might read into this story that it’s taken 14 years for the market to recover from the technology crash and the credit crisis and that stock-market investment has been pointless over that period.

Looking at the blue line on the chart below (the simple price index that you hear quoted in the news) you might think they are right. But that is only part of the story. In fact, it has been possible to make money on your investments since the turn of the century by applying a few simple principles.

First, that the value of dividends and how they compound over time is significant. Reinvested dividends are the difference between the blue and orange lines on the chart. While the simple index has just broken even, an investor who reinvested their dividends would have made around 60 per cent since 1999.

141110 Dimensional Graph

 The growth of £1 invested in the FTSE 100 price index (blue) and FTSE 100 total return index (orange) since December 1999. Source: Dimensional.

Next, remember that there is more to a market than the index you hear quoted on the news. The FTSE 100 is just the largest 100 companies listed in London and, as such, is not representative of the UK market (that would be the FTSE All Share) or the UK economy (that would be GDP). The FTSE 100 excludes hundreds of smaller companies, many of which have performed better than the giants of the London market over the period.

A sensible long-term investment strategy has little to do with the daily quoted indices that dominate news reporting. That strategy would be globally diversified and take into account a detailed assessment of your future financial needs.

We work hard to devise those sensible long-term investment strategies for you and recognise that, in isolation, the FTSE 100’s current level is little more than a single point of fairly meaningless data.  Please contact us if you want to discuss how we could help or if you have any questions about your existing investments

 

Remember that any investment that is linked to stock markets will involve a number of risks including:

  • Past performance is not a guarantee of future performance.
  • The capital value of your investment is not guaranteed. The value of your investment and any income from those investments can go down as well as up and you may get back less than you originally invested.