It's taken 15 years for the FTSE 100 to hit a new high. What lessons have we learned during that period?
On Tuesday, the FTSE 100 index closed at a new all-time high at 6,949.63. The previous closing record, set on 30th December 1999, was 6,930.2.
On the same day, the blue-chip index of elite British companies also hit an all-time intra-day high of 6,958.89, versus 6,950.6 on the last trading day of the previous century.
I think there are seven investment lessons we can learn from the 15 years between the FTSE's peaks.
1. Shares can go sideways for longer than you think
It took the Footsie more than 15 years to exceed its previous peak, which is a significant part of a human lifespan.
In short, stock markets can go sideways for far, far longer than you'd imagine. The Nikkei 225, Japan's main market index, peaked at the end of 1989 at over 38,900, yet stands today – more than 25 years on – at just over 18,600. When share prices burst after a bubble, they can take decades to get back to their former heights.
2. Even big company shares can crash
When stock markets crash, shares in smaller companies often suffer most, largely because these firms are riskier and less resistant to shocks. Nevertheless, over the past 15 years, even shares in some of the UK's biggest listed companies – the so-called 'mega-caps' – have taken a beating.
Take, for example, shares in one-time 'boring' bank HSBC. Its shares closed at 875p on 30th December 1999, but then plunged to a 21st century low below 361p (down 58.7%) during the stock market crash that ended in March 2009.
On Tuesday, HSBC shares closed below 582p, still over a third (33.5%) below their 1999 close.
And if you think that's bad, then just look at what happened to shares in other banks, such as Barclays, Lloyds and RBS since 1999…
3. Dividends matter – a lot
If you'd put money into the FTSE 100 on the last trading day of the previous century, you’d only now be making money, right? Wrong, because almost all FTSE 100 members pay dividends – regular cash payouts – to their owners.
[SPOTLIGHT]Therefore, although the Footsie has only just beaten its former record in capital terms, reinvesting dividends to buy yet more shares has produced real growth. In fact, adding in these reinvested dividends, the FTSE 100 is at least two-thirds (67%) higher than it was at the end of 1999.
So dividends matter – to the point where it’s fair to say that they are the key to unlocking the riches available from long-term investing in shares. Ignore them at your peril.
4. The market isn't expensive today
Way back at the end of 1999, the UK stock market and others were clearly in the midst of one almighty bubble. During this ‘dotcom’ boom, the price-earnings ratio (PER) of the FTSE 100 – a measure of its relative costliness – reached the dizzying heights of almost 30.
Today, after a six-year bull market since the lows of March 1999, the FTSE 100's PER stands at 16, which is fractionally above its long-term average of 15. This means shares are roughly half as expensive today as they were during the nineties bubble, which could mean they have even further to run.
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5. You can even make money from 'The Big W'
Anyone putting all of their money into the stock market on the final trading day of 1999 would be pretty disappointed with their returns since then. Their only gain would be the 67% return they made from reinvesting dividends, which works out at a feeble compound annual return of less than 3.5% a year.
While this beat inflation, even cash would have produced superior returns.
Then again, only the most foolish investor would pile all of his/her money into the market on a single day. Fortunately, most of us play it safe by drip-feeding monthly sums into shares over a long period and avoid diving in right at the top.
Since its previous peak in 1999, the graph of the UK stock market has traced a 'Big W'.
It more than halved by March 2003, before doubling by mid-2007, halving again by March 2009 and then doubling again to its present level.
Drip-feeding money into the market throughout this Big W would have produced far greater returns than piling in as the market soared in 1999. That's why it's the best strategy for most investors.
6. Foreign stock markets have done better
Other major global indices have done much better than the FTSE 100 over 15 years, backing the argument for investing globally, rather than purely locally.
For example, the S&P 500, the main US market index, surpassed its millennial peak in 2007 and is now ahead of its turn-of-the-century record by almost half (45%). Meanwhile, the DAX 30, Germany's main market index, has done even better, besting its millennial heights by almost two-thirds (65%) to date.
So to capture the best of global growth, it’s important to invest globally, rather than just sticking to UK stocks.
7. Be fearful when others are greedy
Lastly, an important lesson the FTSE 100 has taught us in the past 15 years is, in the words of investment great Warren Buffett, "Be fearful when others are greedy and be greedy when others are fearful."
Investors who followed this mantra at the market's crucial turning points in 1999, 2003, 2007 and 2009 would have done very well indeed.
What will happen to the FTSE 100 over the coming 15 years? Impossible to say, but there will be more crashes, bubbles and red-hot buying opportunities to come, so tread carefully.
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