How relevant is the FTSE 100 to you?
It’s difficult to escape the FTSE 100 in your daily life and the stock index is the most recognizable investment index in the UK, but is it really very helpful to know what is happening with the FTSE 100 on a daily basis?
I work in financial services and hear people often discuss what is happening with the FTSE 100 on almost a daily basis and so many commentators come up with reasons for the fluctuations, yet I can honestly say I don’t really know what level it is currently. (I’ve looked it up for this article and as of 23/05/2016 it’s 6,141).
Can someone please explain to me what real benefit that information is to you as an investor?
Surely it is only relevant if you are actually planning to buy/sell a FTSE 100 related investment on that particular day.
For most people, most of the time, it is just noise.
Noise wastes your time.
Time, which could perhaps more constructively be used reviewing company accounts and businesses from an investment perspective; or more enjoyable pursuits from a lifestyle perspective.
As an investor, what you should consider however is whether the price changes are related to changes in business performance or simply an increase/reduction in the sale price of part ownership of a business.
It is also rather unhelpfully used in the media as some kind of health gauge for the UK economy, despite two very large flaws.
- Economic growth and stock market performance doesn’t move in unison, at least in the short to medium term. Very long term, there’s a link between economic health and the valuation of the companies operating within that economy, but this can diverge for long periods.
- The FTSE100 isn’t really an index of the 100 largest companies operating in the UK. Research conducted by Capital Group indicates that 77% of FTSE100 company earnings comes from outside the UK, in a variety of international markets and economies.
So, you could in fact think of the FTSE100 as a global index. A global index of very large companies operating in a variety of international markets, that have decided to list on the London stock exchange due to the high standards for listing, gaining status and access to a large pool of investors.
Currency fluctuations also have a large effect on the earnings of the FTSE100 companies, as they do for many large international companies, so by investing in the FTSE100, it’s a way of diversifying your investments away from the UK economy and the British pound.
So while the FTSE100 can be very useful to an investor, try not to pay too much attention to it.