I can summarise in a single graph why it pays to invest in stocks and shares, and in turn, which British stock indexes are the best to back over the long term.
For the flashy headline consider this: if you had invested £1000 in the FTSE 250 index in 1990, then even if you spent all of the income it produced you’d have £4708.10 in your account. If you had invested £1000 and re-invested the income, you’d have £7892!
Returns
There are actually two sets of returns – the value of the index (represented by the graph) and, crucially, the Total Return. One represents the price of the underlying securities, a lot like looking at a stock chart that is an average of the stocks that sit within it. The other represents the stock price and income and it is therefore more representative of your total return.
Let’s have a look at the two:
Price Return (without income)
| Index | Return 1990-2020 |
| FTSE All-Share | 162.05% |
| FTSE 100 | 140.79% |
| FTSE 250 | 470.81% |
| FTSE 350 | 248.16% |
| FTSE Small Cap | 238.79% |
Total Return (with income)
Getting data that goes back to 1990 can be expensive, so let’s take a smaller snapshot. If we just look at the past 17 years since 2003 we get the following:
| Index | Price Return 2003-2020 | Total Return 2003-2020 |
| FTSE All-Share | 98.5% | 163.87% |
| FTSE 100 | 80.7% | 148.9% |
| FTSE 250 | 243.79% | 618.70% |
Since 2009 the FTSE Small Cap index has returned 294.2% against the 280.5% return for the FTSE 250 index. Remember that it is over 4-fold if you re-invest dividends and income! And in the case of the FTSE 250 it is more than 6-fold since 2003!
Previous returns since 1990 suggest that the FTSE 250 and the FTSE Small Cap index will out-perform the larger stock indices.
What this means for you
Over the long haul it has paid to invest in the “mid cap” and “small cap” components of the stock index. That means I would advise buying two of these index trackers and holding it for 20 years. Not 20 minutes, 20 hours, or so many days, weeks or months. Years!
- 1. FTSE 250 Index Tracker – Vanguard FTSE 250 Tracker – Ticker = “VMID”
- 2. MSCI UK Small Cap Index – iShares MSCI UK Small Cap Ucits ETF – Ticker = “CUKS”
The fact that both have returned more than 4-fold since 2009, on a total return basis if you re-invest dividends, is fantastic performance.
After all, the Frugalist Investor has one simple goal – that is to double my net worth by 2030 and retire early. Looking at the data above I like the odds of this: the FTSE 250 managed a 6.2-fold rise between 2003 and 2020, or within 17 years. I am looking for a 2-fold rise within 10 years. Not asking the world here!
There is a bright side to this crisis: the FTSE All Share has taken an absolute battering and as you can see from the original chart, the return from 1990 – February 20th 2020 was just over 700%. After the latest stock price collapse due to Coronavirus, that is now 470.8%.
There is no guaranteeing that this outperformance will continue in the future. However, it makes sense that smaller and more nimble companies are destined to become tomorrow’s winners and should therefore have exposure in your portfolio.
