Jan 12, 2017 | EWAN ROSIE
As we enter into the new year, both the US and UK stock markets are currently trading at all-time highs. Whilst existing investors will be enjoying the returns of their portfolios, newcomers often question whether now is a good time to be investing?
The FTSE 100 Index (which measures the UK stock markets top 100 companies by market capitalisation) is currently valued at 7,301. Yet it hovered just under 7,000 back in 1999 at the height of the dot com boom, closing at 6930.20 on 30th December that year. And this figure stood as the highest closing market value until February 2015.
So, if the stock market hasn’t been able to surpass this level in 17 years, would an investor have been better off just holding cash?
If you look at the FTSE 100 Index this way, it seems the return of the market has been just 4.98%:
Over the same period, cash would have grown by around 16% before tax. Not startling, but at least you’d have taken no risk.
However, viewing the FTSE 100 Index like this leaves out an important return element; dividend payments from the underlying companies.
If you invest in a fund that tracks the FTSE 100 Index, you have the option to re-invest these dividends and that makes a huge difference, as highlighted by the chart below.
Taking this strategy, an investor’s gross total return over the same period would have been 88.89%. This is significantly higher than historical movements in the FTSE 100 suggest. And much bigger than cash would have returned.
The annual Barclays Equity Gilt Study, adds weight to the above by comparing the stock market to cash and government bonds (gilts):
Today’s value of £100 invested at the end of 1945
All this adds up to one conclusion. Over longer periods of time, re-investing income (whether it be dividend or interest) makes a huge difference to the value of an investment portfolio, no matter what the value of stock markets at the point of entry. Christmas, summer or Friday 13th, it’s not when you invest that matters, but that you do so in the right way, and keep re-investing!
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 14 August 19. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. Tax and estate planning advice are not regulated by the FCA.
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