So far, 2023 has not been a notable year for owning FTSE 100 shares. Since the turn of the year, the flagship index has moved up by under 1%. In other words, it is more or less flat.
Over five years, it is a similar picture. Today, the FTSE 100 index stands 0.3% below where it was five years ago.
Is this a pause in an upwards march — or the calm before a storm?
Long-term investor
Perhaps surprisingly, I think it could be both.
How one sees the current position may depend on what timeframe one adopts as an investor.
In terms of the recent flat market possibly being a calm before a storm, I think there are growing indicators of problems in the economy. Growth is low or non-existent in many large economies. Inflation remains high and the UK housing market looks to me increasingly like it may be heading for a fall (though that has not stopped me from owning housebuilder Persimmon in my portfolio). I would not be surprised if that sees the FTSE 100 losing steam in the next year or two.
But as a long-term investor, I remain confident about what the future holds for the FTSE 100 index. It may move around, even considerably, in years to come. But I would be surprised if it is not higher one or two decades from today than it is now.
Compounding dividends
Investment return is not just driven by capital gain (or loss), but also by any income received along the way.
While the FTSE 100 may be flat this year (and over five years) in terms of price, that does not take into consideration the dividends paid by some shares in the index.
Such shareholder payouts are a key reason why I own some blue-chip FTSE 100 names. Take 8.6% yielding British American Tobacco, for example, or 9.8% yielding M&G. Both firms pay me handsome dividends for owning their shares.
If I invest £1,000 in M&G today and compound the dividends, a decade from now even if the M&G share price is flat, my investment ought to be worth around £2,540.
That example presumes that the M&G dividend is sustained. That is never guaranteed, though by diversifying my portfolio across a range of carefully selected FTSE 100 shares, I hope to build strong long-term income streams.
Focus on quality
Another perspective I find helpful when considering what might happen next in the market (in reality, nobody knows for sure) is that I am not ‘buying the index’.
Some investors do that by investing in tracker funds, for example. But I am currently invested instead in individually chosen shares.
So, even if the FTSE 100 performs weakly, it does not necessarily follow that my own portfolio will do the same. I therefore aim to focus on finding brilliant companies with shares trading at attractive prices. I hope that they can outperform the broader market over time. Right now I am hunting for FTSE 100 bargains!
This post was originally published on Motley Fool
