FTSE Expected Rate of Return

[Sebster10]

Hi All,

I'm a student living in the UK and I'm attempting to forecast what my financial future could look like. My problem is that I'm having trouble working out the expected rate of return for the FTSE. (As im assuming it make sense to invest mostly within my own index due to currency risk)

MMM does an amazing job explaining his assumed rate of return from the S&P 500 in this article and I was hoping someone may be able to share something similar for the FTSE?

Thank you,

Seb

[MustacheAndaHalf]

It sounds like you want an international or world fund that excludes UK stocks, but you need to be more specific than FTSE.  FTSE has numerous indices, so it's a bit like asking the expected return for iShares or Vanguard without referencing a specific fund or index.

[Heckler]

Assuming the op is asking about FTSE 100, it looks like past results don't equal future returns.  I would diversify more. Much more.

https://en.m.wikipedia.org/wiki/FTSE_100_Index

[cerat0n1a]

Hi All,

I'm a student living in the UK and I'm attempting to forecast what my financial future could look like. My problem is that I'm having trouble working out the expected rate of return for the FTSE. (As im assuming it make sense to invest mostly within my own index due to currency risk)

MMM does an amazing job explaining his assumed rate of return from the S&P 500 in this article and I was hoping someone may be able to share something similar for the FTSE?

No reason to restrict your investments to the UK, which is after all a small proportion of the overall world economy. Put it another way, if investors knew that the S&P was going to have a different rate of return to the FTSE for the same risk, they would by the S&P, sell the FTSE and things would quickly correct. I don't see any reason to change much in the MMM article you linked for UK investors.

Many of the biggest companies in the FTSE-100 are global operations which expose you to some currency risk anyway (the FTSE-100 has shot up as the pound has fallen.) The thing is that the FTSE-100 has a certain bias - lots of oil & mining, banks but very little tech. There are some advantages to owning UK listed shares (foreign currency dividends can be a bit of a pain when it comes to tax returns) but it's sensible to diversify worldwide.

Look at things like the Vanguard Lifestrategy funds, or the various Vanguard ETFs you can buy through UK brokers. I have VWRL (tracks world index) and smaller amounts of VUSA, VEUR (europe) or VERX (Europe ex UK), VJPN, VAPX (Asia Pacific), VFEM (emerging markets.)

[nobodyspecial]

Especially since nothing is likely to change for the trading environment of UK companies in the next 15 years compared to the last 15

[frugledoc]

Hi All,

I'm a student living in the UK and I'm attempting to forecast what my financial future could look like. My problem is that I'm having trouble working out the expected rate of return for the FTSE. (As im assuming it make sense to invest mostly within my own index due to currency risk)

MMM does an amazing job explaining his assumed rate of return from the S&P 500 in this article and I was hoping someone may be able to share something similar for the FTSE?

Thank you,

Seb

Your assumption is wrong.

The standard advise outside of the US would be to equal weight your home market.  The FTSE makes up around 10% of the global markets so that is your target.

Take a look at Vanguard life strategy or vanguard all world etf.

[Sebster10]

Thank you all for your replies! I will be sure to diversify more heavily outside the FTSE 100.

I'm still unsure how to forecast the growth of my savings however.

Can I assume an averaged out 7% return over my lifetime, not including inflation? If not what could I assume?

Thanks,

Seb

[mgarf]

You can do historical analysis for your target asset proportions (world vs. uk) utilizing the publicly available MSCI indexes.

https://www.msci.com/end-of-day-data-search

For UK, you should be looking at "UNITED KINGDOM" index (for UK) and "WORLD ex UK" index (for the rest of the world).

But since you're gonna invest mostly in world anyways (would not be smart to do purely UK due to decreased diversification), and since the world stock market roughly parallels the US market over long timespans, your expected rate of return will be around 7% (adjusting for inflation) based on a US portfolio (80% US, 20% world). HOWEVER, this is average return. You should always plan for the worst! Historically, the lower bound is around 4% (also inflation adjusted) annually over any 20-year investment timespan.

Smarter people then me are also saying 4% is what we can expect in the next few years... so I'd go with that.

[mgarf]

Let me clarify. And also, I apologize, I made an error in my statement. I meant to say 30-year timespan.

The more correct statement should be this:

If you look at all 30-year timespans from 1926 to 2015 the US stock market (S&P 500) has always given an average annual return over this timespan of greater than 4% (inflation adjusted). If you look at 20-year timespans it becomes 0%.

I do not know of any other country's market data that has this long of a history to analyze, and since, no matter where you live, you should be investing in the world (and therefore 1/2 US by market capitalization), I believe using this US data makes the most sense.


 

[jinga nation]

@Sebster10,

I may not be answering your question directly, but I remembered something Monevator said about diversifying, and not going apples to apples to the US in your comparisons.

Suggest you look at Lazy Portfolios at Monevator: http://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/

Stars and Stripes flavoured lazy portfolios are skewed towards domestic equities. Historically, American investors have been heavily biased towards the home team, and that makes a certain sense given the size, dynamism, and diversity of their domestic market.

UK investors may want to allocate a greater percentage of their equity allocation internationally, given that UK plc only accounts for about 8% of global market cap and that the FTSE All-Share and FTSE 100 are more concentrated than US equivalents.

Monevator's Slow and Steady Portfolio's lastest update (2016 Q3):
http://monevator.com/the-slow-and-steady-passive-portfolio-update-q3-2016/