Simon Read: The FTSE 100 share index is down! No, it's up! Oh, who cares?

  • @simonnread

A few weeks ago, I was working on an article to mark the moment when the FTSE 100 – commonly known as the Footsie – topped 7,000 for the first time.

The article hasn't been published yet for one simple reason. Despite it getting desperately close to the milestone, stock markets took a turn for the worse and it now seems more likely that the blue-chip index will plunge back down below 6,000.

Confused? Look, even seasoned experts can't predict market rises and falls, so don't be worried if they seem inexplicable to you.

Further, you shouldn't even be getting worried about what happens to the Footsie. While it's a useful tool for giving an at-a-glance snapshot of what's happened to markets that day, it shouldn't be used as a basis for making investment decisions.

"Looking just at the index level does not show the whole picture of how equity investments are actually performing, how the stock market is changing and how businesses change and evolve," points out Adrian Lowcock, senior investment manager at Hargreaves Lansdown.

That's partly because the Footsie only covers the 100 largest UK companies. Most of them are global brands, such as Vodafone and Tesco, so following movements of the Footsie gives a distorted and limited view of how UK markets are doing.

For a much better idea, you need to look at the much broader FTSE All-Share index which, oddly enough, climbed through its all-time high last month. It just doesn't generate the same headlines, though, does it?

But even then, such landmarks mean little. Should you be rushing to invest because markets are booming? Or should you be rushing to sell in the anticipation that markets will quickly fall from highs?

Neither is right, because short-term thinking can be disastrous.

"Investors should step back from the short-term wiggles in the market and focus on the long term," advises Tom Stevenson, investment director at Fidelity.

"Timing the market is a mug's game," he continues. "By the time you have processed new information, it is already priced in and acting on the headlines only leads to selling at the bottom and buying at the top."

Mr Lowcock agrees: "It is time in the market that counts, and not timing."

Of course, investors can get very lucky, and buy at the bottom and sell at the top. Day traders even prefer short-termism, looking to dart in and out of the market to make lots of small gains.

But for most average investors, their relationship with the stock market should be a long-term one.

Sure, be aware of market movements but don't rush to act on them. "It is much better to stay in the market throughout the ups and downs," says Mr Stevenson.

"Missing the best days (inevitable for market-timers because they happen when the outlook is bleakest) tends to wreak havoc with long-term returns: £1,000 invested in the FTSE All-Share 15 years ago is worth £2,017 today but only £365 if you had missed the best 40 days over that period."

So, accepting that investment should be a long-term concept, say 10 years or more, there's another reason to ignore the Footsie. It's simply this: the companies listed change regularly.

Because it tracks the UK's biggest firms, those that are taken over, merge or – gulp – go bust are replaced. In fact, in the last 14 years, 39 out of the top 100 companies no longer feature in the Footsie while a further 12 firms changed either as a result of demergers or takeovers by other FTSE 100 companies. It means that less than half the companies in today's Footsie were there 14 years ago.

"This has a significant impact on which sectors dominated the index," Mr Lowcock points out. "Telecoms were responsible for nearly a fifth of the Footsie in 1999, but many companies have disappeared, so today telecoms account for just 7 per cent of the index.

"By contrast, resource companies have more than doubled their weighting from 4.5 per cent to 11.5 per cent as the commodities supercycle took hold." Over the same time, banks grew to represent a large part of the Footsie, and then fell back again.

So don't remain confused about Footsie daily movement, just ignore them – unless, of course, you are invested in tracker funds.

Many trackers are based on the Footsie which means if it starts to collapse, so will your savings.