What are the average returns of the FTSE 100?

FTSE average returns explained

The FTSE 100, or ‘footsie’, is a benchmark index that represents the top 100 companies on the London Stock Exchange (LSE) by marketing capitalisation. As an index is nothing more than a number, investors cannot gain exposure to the index directly but have to do so by purchasing the shares of FTSE 100 companies, or by investing in a FTSE tracker fund or exchange traded fund (ETF). The makeup of a FTSE-linked tracker or ETF would be made to have same weighting as the FTSE 100 itself.

The average return of the FTSE 100 is the mathematical average of the profit or loss to an investment in the index over a specific period of time. The average return is calculated by taking the yearly profit or loss to a FTSE 100 investment over a chosen timeframe, adding these figures together and dividing by the total number of years the data set covers.

So, let’s say that the FTSE 100 had accumulated the following annual returns over a five-year period: 5%, 10%, 15%, 5% and 0%. To calculate the average annual return for the five-year period, these figures would be added together and divided by five. This would give an average annual return of 7%.

How to interpret FTSE 100 total returns data

There is no set good or bad average return, as it will largely depend on the goals of the individual. However, it is often recommended that a portfolio should generate returns of around 8-10% a year.

As an investor, taking profit from the FTSE 100 is dependent on long-term and sustainable returns. However, there are a few factors that can impact an investor’s average return, these include:

• Income. If a FTSE 100 company pays dividends, the index and investor’s portfolio will be adjusted. This can have a large impact on average returns, especially if dividends are then reinvested
• Realised gains. This is the return of an investment after a position is closed
• Unrealised gain. This is the running total of profit on an open position

It is important to take all of these factors into consideration, particularly because dividend payments can have a significant impact on index returns.

For example, price-wise the FTSE 100 closed lower in December 2018 than it did in December 1999 – at values of £6845 and £6930 respectively – but if you include reinvested dividends, investors would have seen returns of 93.5% over the 20-year period. This is an annual return of 3.54%, not adjusted for inflation.

How has the FTSE 100 performed over time?

The performance of the FTSE 100 is impacted by a variety of factors, such as monetary policy, geopolitical factors and news, which could impact the individual companies or industries on the index. Although from year to year the footsie has experienced mixed results and volatility, overall there has been an upward trajectory.

Average returns will depend on the time period under consideration¹, so it is important to look at different timeframes to fully grasp the successes and failures of the FTSE 100.

FTSE 100 performance over the last five years

The average returns of the FTSE 100 over the last five years have been a decidedly mixed bag – with figures (including reinvested dividends) ranging from a low of -1.3% to a high of 19.1%. Despite some negative figures, the total five-year average return would be 4.3% with dividends reinvested.

Looking at the period in question, perhaps the largest factor impacting the health of the companies on the footsie index was the ongoing Brexit debate and negotiations. The vote not only had political and social repercussions, but it had far reaching implications on the businesses and industries that make up the FTSE 100.

FTSE 100 performance over the last ten years

Looking at the FTSE 100 from 2009 to 2018, there have been some good years and some bad years. The largest annual return with dividends reinvested was in 2009, when investors saw returns of 27.3%, while the lowest annual return was still -8.7% in 2018. Over the ten-year period, this was an average of 8.8% per annum, which would have been considered a good average return.

During this timeframe, the UK economy was just starting to recover from the 2008 financial crisis. In March 2009, the footsie reached a six-year low, trading below the £3700 mark for the first time since 2003. But the index experienced a spectacular recovery throughout the remainder of the year, as the top 100 firms collectively increased in value by more than 22%.

FTSE 100 performance over the last 25 years

During the last 25 years, the FTSE 100 experienced volatility due to the dotcom bubble and the 2008 financial crisis – both of which had a significant impact on the FTSE 100 price and annual returns.

Toward the end of 1999 the footsie was considered overvalued as expensive technology shares had entered the index and driven the price up to a high of £6930 in December 1999. After the sustained period of excessive speculation, the bubble burst and the market fell to a low of £3567 in January 2003.

In 2008, the FTSE experienced its worst 12-month period since the index was first established in 1984. Its average annual return (without dividends reinvested) was -31.3%, and the index finished the year trading at £4434. If an individual had invested £1000 at the start of 2009, it would have been worth just £717 by the end of the year. But as we have already seen, the FTSE 100 did bounce back the following year.

How can investors and traders use FTSE 100 average return data?

Investors and traders can use FTSE 100 average return data to influence their strategy, although it is more commonly used in investing.

• Creating a plan. The strategy an investor chooses will depend on their goals for investing, including how much money they want to make and the timeframe 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 trends
• Speculating on short-term movements. 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 purchasing shares of FTSE 100 companies, putting capital into an FTSE 100 index fund or a FTSE ETF. Whereas when you trade the FTSE 100, derivative products – such as CFDs – enable you to speculate on the price of the stock index itself.

FTSE 100 average returns summed up

As analysing FTSE 100 average returns can be a complex process, we’ve highlighted a few key points you should know:

• An average return is the mathematical average of the profit or loss to an investment in the index over a specific period of time
• An average annual return is calculated by taking the yearly profit or loss to a FTSE 100 investment over a certain number of years, adding these figures together and dividing by the total number of years the data set covers
• It is often recommended that a portfolio should generate returns of around 8-10% a year
• Average returns will depend on the time period under consideration, so it is important to look at different timeframes to fully grasp the successes and failures of the FTSE 100
• Investors and traders can use the concept of average returns to influence their strategy, although it is more commonly used in investing

¹ The timeframes in this article end at the time of writing, March 2019
² FTSE Russell, 2019
³ Yahoo Finance, 2019