A lesson from history: how sensible investing could have made you a million
Those who had saved their full annual allowance into a Personal Equity Plan (PEP) – the precursor to the modern individual savings account (Isa) as we know it – and then an Isa since 1987 could now be sitting on well over £1 million, according to Fidelity International.
That’s a total of £242,520 invested for a return of £1,289,687.
However, it’s worth noting that this would only be the case if the saver had invested solely into the FTSE 250, which is the index that tracks the UK’s 101 to 350 biggest companies, rather than the 1 to 100, which is the job of the better known FTSE 100.
For the record, those investing into the FTSE 100 would have had relatively paltry returns of £628,969 and those buying into the FTSE All Share, which tracks the fortunes of 1,000 UK-listed companies, would be looking at £680,489. Nothing to be sniffed at, but you’d only be buying 3 Ferraris rather than 6.
This isn’t a case of saying ‘I told you so’, rather, a way of illustrating that regular investing can carve the way to staggering gains as long as you save methodically, making it a lifetime habit rather than something done in the event of a windfall or other good financial luck. After all, it’s not as though the years 1987 to now were in any way unusual - topsy-turvy and maddening, yes, but, in the bigger picture, business as usual.
The other point to take from this is that medium and smaller-sized companies can be a safer bet than their larger and better-known brethren.
As Tom Stevenson, investment director at Fidelity says: “The outperformance of smaller companies reflects a combination of factors. In part it is a symptom of Jim Slater’s famous adage ‘elephants don’t gallop.’
"In other words, it’s easier to grow smaller companies rapidly than larger ones… the FTSE100 index is biased towards banks, pharmaceuticals, oil and gas and commodities, all of which at different times have been indifferent performers.”
If you haven’t invested before and you do fancy it, read our article ‘Get investing in 2016’.
An unexpected one-off financial gain in cash or shares, generally when mutual building societies convert to stock market-quoted banks. Also windfall tax, a one-off tax imposed by government. The UK government applied such a measure in the Budget of July 1997 on the profits of privatised utilities companies.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.