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 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 time frames 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

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