What are the average returns of the FTSE 100?

FTSE 100 average returns: the need to knows

The FTSE 100 index represents the top 100 companies on the London Stock Exchange (LSE) by market capitalisation and was created on 3 January 1984 with a start value of 1000.

Investors can gain exposure to the UK stock market by investing in a FTSE 100 exchange traded fund (ETF) on IG’s share trading platform, or by investing in one of IG’s ready-made portfolios called IG Smart Portfolios. These invest in different assets classes, including FTSE 100 stocks using iShares Core FTSE 100 UCITS ETF.

Those looking to trade the FTSE 100 index can do so in a contract for difference (CFD) on IG’s trading platform.

Learn more about the best ways to trade or invest in the FTSE 100

What kind of average returns can investors expect if they invest in the FTSE 100? First, it is important to distinguish between price returns and total returns. The price return for the FTSE 100 is linked to the price of the index that you might see quoted by financial news stations. For example, the price of the FTSE 100 ended 2019 at 7542.44, 12.1% higher than 12 months earlier.

The total return for the FTSE 100 includes the price return of index and also any dividend’s that companies listed on the FTSE 100 have paid out to investors over the period. On a total return basis, the FTSE 100 returned 17.1% over 2019, which means that dividends contributed 5.1% of the total returns, a healthy payout given that UK interest rates are close to zero.

However, this is just one years’ worth of data. To get a better idea of the average annual return that an investor can reasonably expect to receive over a longer period of time, you can take the total return for the FTSE 100 over an extended period and annualise this number.

How to calculate annualised returns

Looking back over a longer time frame gives an investor a better idea of the average return they can expect. Between 1984 and 2019, the FTSE 100 rose by 654% in price, and 1377% on a total return basis. On an annualised basis, this amounts to an annual price return of 5.8% and an annual total return of 7.8%.

FTSE 100 returns (1984–2019)

^{Source: IG}

The calculation to annualise investment returns is as follows:

(1 + Period return %) ^ (1 / number of periods) – 1 = annualised return

(1 + 654.2%) ^ (1 / 36) - 1 = 5.77%

Note that the data starts from 30 December 1983

Why reinvesting dividends is key to long-term returns

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 growing your long-term wealth.

This is because an effect known as compounding. This is where cash dividends are re-invested and start to earn their own dividends. Initially, the impact is small, but as time goes on the power of compounding starts to make a large impact on the value of your portfolio.

The chart below shows £10,000 invested in the FTSE 100 at the start of 1986. The orange line shows that if the investor had automatically reinvested any dividends they received, their investment would have grown to £195,852. The red line shows that this would have grown to just £53,394 if the investor had chosen to use the dividends received for other purposes.

How has the FTSE 100 performed over time?

The performance of the FTSE 100 is impacted by a variety of factors. Economic growth, interest rates, fiscal policy and commodity prices all influence a company’s ability to grow revenues and profitability.

The stock market will generally move in the same direction as economic activity. Falling in value before an economy enters into recession, and rising before the economic recovery begins. The chart below shows the range of annual returns for the FTSE 100 over the last 35 years.

What are the largest drawdowns for the FTSE 100?

While the average annual price return for the FTSE 100 was +6.8% since 1984, investors should be prepared for a range of potential annual returns. The largest annual price return was 35.1% in 1989 while the lowest was -31.3% in 2008.

However, this does not reflect intra-year price movements. To capture the largest drops an investor may face, or what is known as a 'drawdown', we looked at daily price data for the FTSE 100 going back to its inception.

FTSE 100 drawdowns

The largest peak-to-trough decline was 52.6% in March 2003. A number of events put downward pressure on UK stocks during this bear market. The collapse of the dotcom bubble brought about massive declines in the share price of many FTSE 100 companies. Telecoms giant BT Group’s share price fell by over 85% from its previous peak. Investor confidence in global stock markets was also damaged by the 9/11 terrorist attack. It wasn’t until the start of the Iraq War that the FTSE 100 index reached a bottom at 3287 in March 2003.

Largest FTSE 100 drawdowns (1984–2020)

^{Source: IG
*Rise in the FTSE 100 to 22 May 2020}

Other major declines occurred during the Great Financial Crisis of 2007-2008, the current coronavirus crash and in 1987 following Black Monday, where investor panic and computer-driven trading models that followed portfolio insurance strategies precipitated the crash.

This analysis shows that while these extreme market crashes are rare in nature, investors should reasonably expect the stock market to decline by more than -30% every ten years.

Falls of this magnitude can certainly be concerning for investors. But selling your investment in attempt to avoid further losses is generally not a good strategy. The table above shows that the FTSE 100 recovers a large part of its losses over the following 12 months after the index reaches a trough. It is important to note, though, that a +40% rise after a 53% decline does not leave you 13% down, but -34% down. A 50% drop requires your investment to rise by 100% to breakeven on your initial investment.

Best and worst FTSE 100 returns for different holding periods

Investing over a longer time frame helps to reduce your chances of realising a loss on your investment. This can be shown by looking at different holding periods and taking the lowest annualised return for each time horizon.

Worst annualised total return for different holding periods

^{Source: IG}

The worst two-year return since the FTSE 100 was created was -33%, or -18% on an annualised basis, between 31 December 2000 and 31 December 2002.

The worst five-year annualised return was -4% per year, between 31 December 1999 and 31 December 2004.

Since the FTSE 100’s inception in 1983, there has never been a ten-year holding period where the investor lost money. The worst ten-year annualised return was +0.3% between 31 December 1999 and 31 December 2008.

What is also apparent is that the time at which an investor makes their initial investment has a large impact on their long-run average return. An investor that bought the FTSE 100 in 1989 would have been rewarded with an annual average return of 18% over the following 10 years, compared to a 0.3% annual average if they had bought in 1998 and sold at the end of 2008.

Ten-year FTSE 100 returns (1985–2009, annualised)

The orange line in the chart above shows that by increasing the length of your investment horizon, the average annual return that you can expect is smoothed out somewhat. The array of investment outcomes for a 20-year holding period ranges from 11% to 4% per year, on average.

FTSE 100 performance over five-year periods

Over the last five years the total return for the FTSE 100 was +40.72% with dividends reinvested, or a 7.07% annualised return. This is despite annual returns being mixed, with a range from a low of -8.73% to a high of 19.07%.

Looking at all the possible five-year holding periods since the FTSE 100’s inception shows an average annual return of +8.92%.

The worst return over five years was a -19.53% return (-4.25% annualised) and the highest return a +168.35% return (+21.83% annualised, between 31 December 1994 and 31 December 1999).

FTSE 100 performance over five-year periods (1984–2019)

^{Source: IG}

FTSE 100 performance over ten-year periods

Over the last ten years the total return for the FTSE 100 was +103.98% with dividends reinvested, or a 7.38% annualised return. This is despite annual returns being mixed, with a range from a low of -8.73% to a high of +19.07%.

Looking at all the possible ten-year holding periods since the FTSE 100’s inception shows an average annual return of +8.43%.

The worst return over ten years was a +3.20% return (+0.32% annualised) and the highest return a +403.12% return (+17.53% annualised, between 31 December 1988 and 31 December 1998).

FTSE 100 performance over ten-year periods (1984–2019)

^{Source: IG}

FTSE 100 performance over 25-year periods

Over the last 25 years the total return for the FTSE 100 was +380.52% with dividends reinvested, or a 6.47% annualised return. This is despite annual returns being mixed, with a range from a low of -28.33% to a high of +28.68%.

Looking at all the possible 25-year holding periods since the FTSE 100’s inception shows an average annual return of +8.33%.

The worst return over 25 years was a +375.31% return (+6.43% annualised) and the highest return a +981.38% return (+9.99% annualised, between 31 December 1985 and 31 December 2010).

FTSE 100 performance over 25-year period (1984–2019)

^{Source: IG}

Nominal versus real returns

Inflation erodes the value of money, meaning that at a 2% annual inflation rate, £1 in today’s money will buy 98p worth of the same basket of goods the following year. This concept is known as the time value of money.

A key reason why investors invest over the long term is to keep up with these rising prices, allowing them to be able to maintain or improve their standard of living.

Since 1985, the UK inflation rate (measured by the retail price index [RPI]) has actually averaged 2.7%. This means that leaving cash in the bank, or investing in an asset that yields less than this rate means your purchasing power is diminishing.

Real return % = Nominal return % – Inflation rate %

Over the last 35 years, the FTSE 100 has on average comfortably provided investors with inflation-beating returns. Nominal returns have averaged 7.75% while RPI inflation has averaged 2.70%, implying that the average real return over this period was 5.05%.

Looking back over a much longer period of time supports the case for investing in stocks to beat inflation. Over the last 119 years, UK stocks 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%.

How investors and traders can use FTSE 100 average return data

Investors and traders can use FTSE 100 average return data to influence their long-term strategy, and to keep their expectations within reasonable boundaries. Ultimately, while returns are important, how much you save and invest has a larger bearing on long-term wealth.

• Create a plan. The strategy an investor chooses will depend on their goals for investing, including how much money they want to make and the time frame they want to achieve their target in. By looking at historical average returns data, an investor can get rough guidance of whether their aims are possible. Past performance should not be taken as a definitive guide to the future of the FTSE 100, but it can indicate likely trend.
• Understand the power of compounding and long-term investing. Between 1999 and 2018, the FTSE 100 brought returns of 3.18% a year, meaning the value of your original investment would have increased by 81.3%. The return would have been improved by investing regularly during that period, known as pound cost averaging
• Speculate on short-term movements. FTSE futures traders can use the average return of the FTSE 100 as part of technical analysis. By looking at the past performance of the index, traders can make a decision about whether to take a longer-term view of the market or take advantage of shorter-term volatility

When you invest in the FTSE 100, you would do so by buying a FTSE 100 ETF or index fund. Whereas traders taking a short- or medium-term view might speculate on the index using derivative products – such as CFDs. Leverage can magnify your gains and losses.

If you want to start trading the FTSE 100, you can open a live account with IG in minutes. Or, if you want to build your confidence trading the FTSE 100 first, you can practise trading in a risk-free environment using an IG demo account.

FTSE 100 average returns summed up

• FTSE 100 total returns have averaged 7.75% per year since its inception.
• But average returns will depend on the period under consideration, so it is important to look at different time frames to understand the range of that the FTSE 100 has provided historically.
• Long-term average investment returns are referred to as annualised returns, not a simple average.
• Make sure you consider inflation, as this can significantly distort data. A nominal gain of 10% is rather mediocre if inflation was 5%.
• You can trade the FTSE 100 in a CFD contract.
• If you are looking to buy a FTSE 100 ETF on IG’s share trading platform, there are many different ETFs to use.
• Alternatively, IG Smart Portfolios offers investors a low-cost way to purchase a diversified portfolio which has exposure to UK equities. We now have a three-year performance track record.

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¹Barclays Equity Gilt Study, 2019