What are the average returns of the FTSE 100?

FTSE average returns explained

The FTSE 100 index represents the top 100 companies on the London Stock Exchange (LSE) by market capitalisation. Investors can gain exposure to the FTSE 100 as a whole by investing in FTSE exchange traded funds (ETFs) or tracker funds, or by trading index futures via CFD.

But what kind of returns can investors expect to see? FTSE average returns refer to the investment gains or losses an investor would have seen to their capital over a set period of time by tracking the FTSE.

Investors use compound returns when referring to investment gains. This is because compound returns take into account the effect of dividend reinvestment as well as capital growth.

Therefore, if your annual return (capital gains and dividends) was 10% in year one and 15% in year two, your total return would be +26.5% (not 25%) and your annualised return is 12.47%.

This is important when looking at longer-term returns. Simply adding together returns and dividing by the number of years will result in the wrong number.

How to calculate annualised returns

To calculate your annualised return, you need to multiply the annual returns together and then again to the power of 1 divided by the number of years.

E.g. 1.1 x 1.15 = 1.265 and (1.1x1.15)^(1/2) = 1.1247

How to interpret FTSE 100 total returns data

Because of the distortive impact of high inflation, it makes most sense to look at inflation-adjusted ('real') returns over longer time periods. Over the last 119 years UK equities 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%.

This number masks significant swings in asset values. Over ten-year periods equities have made as much as an annualised +12.4% to -3.5% a year after inflation.

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 long-term wealth.

For example, the FTSE 100 index closed -2.9% lower in December 2018 than it did in December 1999 – but if you include reinvested dividends, investors would have seen returns of +81.3% over the 19-year period. This is an annual return of 3.18%.

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.

Average returns will depend on the time period under consideration,² so it is important to look at different timeframes to better understand the range of outcomes that an investor in the FTSE 100 might be exposed to.

FTSE 100 performance over the last five years

The annual return over the past five years was 3.9% with dividends reinvested. This would be a total return of 21%.

This is despite annual returns being mixed, with a range from a low of -1.3% to a high of 19.1%.

FTSE 100 performance over the last ten years

Over the past 10 years, the compound return was 8.8% per annum, which is around average once inflation is taken into consideration. As a total return that was 121%.

During this timeframe, the UK economy was just starting to recover from the 2008 financial crisis. In March 2009, the FTSE 100 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

The compound annual return of the FTSE 100 the last 25 years was 6.4% with dividends reinvested. This would be a total return of 375%. The longer you are invested, the greater the chance you have of generating substantial long-term returns.

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. 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 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
• 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.

FTSE 100 average returns summed up

• Long-term investment returns are always referred to using compound 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%
• Average returns will depend on the period under consideration, so it is important to look at different timeframes to fully grasp the successes and failures of the FTSE 100
• Alternatively, IG Smart Portfolios offers investors a low-cost way to purchase a diversified portfolio. We now have more than two years of performance history

Footnotes

¹ Barclays Equity Gilt Study, 2019
² The timeframes in this article end at the time of writing, March 2019
³ FTSE Russell, 2019
⁴ Yahoo Finance, 2019