FTSE100 up up and away?

The FTSE100 is close to its 12 month high (again). The 12 month high is currently 6091.33 achieved in February, today the index is trading at around 6025. This is still some way off the all-time high in December 1999 of 6930.20, but a significant improvement on 5th March 2009 at the credit crunching depths of 3512.10. Perhaps conveniently, this date is now 2.33 years ago, representing an annualised return of 26% excluding dividend income.

In practice few people invested on 5th March 2009, most simply had to wait for their investments to recover. I dare say that marketing departments of Fund Management groups will now be working hard to show their data in a very positive light. However, remember that a rising tide lifts all boats. In practice the FTSE100 is now pretty much back where is was prior to the credit crunch nightmare. The question then is what have we learned? It has taken a little over 2 years to recoup losses for those that were invested? hopefully rather more than simple maths. An important (vital) lesson is to take a long-term view.

Much can be hidden in statistics. Consider that on 5th March 2008 the FTSE100 index was nearly 20% lower than its all time high. Over the next 12 months it fell 40%. On that day the index was 50% of the all-time high. The following 12 months see the index rise 60% but still 15% below the all-time high. Marketeers (and journalists... and unscrupulous financial advisers) use these sort of statistics to overstate a point. Not convinced? here's the facts:

30th Dec 1999   6,930.20 (all-time high)

5th March 2000 6,487.50 (93.61% of all time high) fall of 6.3% from all time high

5th March 2001 5,931.30 (85.58% of all time high)

5th March 2002 5,214.00 (75.23% of all time high)

5th March 2003 3,563.50 (51.41% of all time high)

5th March 2004 4,547.10 (65.61% of all time high)

5th March 2005 5,036.30 (72.67% of all time high)

5th March 2006 5,858.70 (84.53% of all time high)

5th March 2007 6,058.70 (87.42% of all time high)

5th March 2008 5,853.50 (84.45% of all time high)

5th March 2009 3,529.90 (50.93% of all time high) fall of 40% in 12 months

5th March 2010 5,599.80 (80.80% of all time high) rise of 59.4% in 12 months

5th March 2011 5,990.40 (86.43% of all time high) rise of 6.9% in 12 months

5th March 2012 ????????

I should point out that this is merely the level of the FTSE100 index. Investors would have received income from dividend payments, so although there are falls in the valuations, income from dividends would mean that actual investment values are higher. The value of income from investment should not be underestimated.

Whilst there are people that have voiced the view that they "saw it coming" deciding when to withdraw from the market and then when to re-enter is very very difficult. Many people who saw the value of their portfolios reduce as a result of the credit crunch decided to hold cash, but by doing so missed a 60% rise in the market if they stayed out of the market for just 12 months waiting for things to get better. If you are looking for patterns within the data, I am afraid that the only pattern is that there is no pattern.

I hope that this is a reminder that whilst the media will now start to talk up the success of the FTSE100 closely followed by fear that Europe and America may implode, taking the a long-term perspective is vital. Please consider my document "Our Approach to Investing" for further information.