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

 

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.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
tech
Arts and Entertainment
Kanye West, performing in New York last week, has been the subject of controversy as rock's traditional headline slot at Glastonbury is lost once again
music
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Life and Style
Drinking - often heavily - is a running theme throughout HBO's Game of Thrones adaptation
food + drink
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

    Fishing is on Nigel Farage's mind

    Ukip leader casts a line to the disaffected
    Who is bombing whom in the Middle East? It's amazing they don't all hit each other

    Who is bombing whom in the Middle East?

    Robert Fisk untangles the countries and factions
    China's influence on fashion: At the top of the game both creatively and commercially

    China's influence on fashion

    At the top of the game both creatively and commercially
    Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

    The man known as GOD has a reputation for getting the job done

    Lord O'Donnell's three principles of rule
    Rainbow shades: It's all bright on the night

    Rainbow shades

    It's all bright on the night
    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living