The situation in the UK five years ago was very different to today. Wearing face masks would have got me a strange look on public transport for a start! Back in early 2017, the UK was still getting to grips with the 2016 Brexit vote and what it might mean going forward. We were also getting ready for a general election, that took place in June 2017. Aside from politics and social events, what about my investments? Would a straightforward FTSE 100 tracker have yielded good results over the past five years?
Small capital gains
Exactly five years ago, the FTSE 100 index closed at 7,338 points. The market is currently at 7,481 points, meaning that I’d be sitting on a profit from this period. It works out at just under 2%. So over five years, this translates to an annual return of 0.4%.
There are several observations that I can make about this. Firstly, yes I’d have made a profit. Admittedly, it’s not as much as I might have hoped for. Yet I do need to appreciate that this is the gain purely from share price appreciation. It doesn’t take into account dividend payments, which I’ll come to shortly.
So is 2% over five years a good return? One way to assess this is to look at the volatility of the FTSE 100 tracker. For example, during this period, the lows were around 5,000 points back in March 2020. This is a steep fall, meaning that at this point my unrealised loss would have been 32%.
On the other side, the highs of 7,877 points in 2018 would have put me in profit by just over 7%. So the risk versus return looking back over this period doesn’t quite stack up in my opinion.
Don’t forget the dividends!
One major point that many forget when looking back is to take into account the dividend payments. I might have only made 2% from the FTSE 100 tracker’s share price, but I’d have received good dividends during this period. The average dividend yield of the index over the period was 3.91%. This adds up to give me a return from dividends of 19.56%.
When I add this to my total profit figure, it looks a lot more healthy. This serves to remind me of an important point when investing for the long run. This is that dividend shares can be a great source of income even if the share price doesn’t move much.
That’s one reason why the high dividend yields currently on offer from some individual stocks in the FTSE 100 are attractive to me. A FTSE 100 tracker will give me an average dividend yield. If I think that I can outperform the index, then I can select a smaller group of stocks. This way, I can target a higher yield.
Stock-picking within the FTSE 100
I’d have generated a profit from a FTSE 100 tracker over the past five years, but maybe not as much as I might think. If I targeted high growth stocks back in 2017, I might have found myself sitting on larger unrealised gains now. Clearly, beating the index isn’t an easy task by any means. But being active in my stock picks (be it for income or growth) can help me to perform well in the long term.
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Jon Smith and The Motley Fool UK have no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
