B of E rates v the FTSE

ViksB

Last night, I pondered to myself if the growth in the FTSE was in anyway correlated to the B of E base rate.
So I did a very rough spreadsheet, which took the FTSE 100 value in July each year back to 1984 and a rough average of the B of E rates for the corresponding year. It didn't correlate at all with the FTSE % growth going up and down like a yo yo.
I then worked out what £100 in an account at B of E rate would be worth now compared to £100 in a FTSE. I was surprised by the lack of difference £100 in 1984 would be worth £521 in B of E and £661 in the FTSE. I was expecting a larger difference.
I then calculated the same for 1985 , 86 etc and found that in 6 of the 23 years the FTSE investment would be worth less than the B of E investment. By investing £100 each year would give you a 5% (over 23 years) better growth than the B of E. This does not seem very significant.
I am assuming I have done something wrong with my calculations. I appreciate that you would probably have to pay tax on the interest of the Bof E and this would make a large difference, but for a non tax payer there does not seem to be much benefit.
I appreciate the FTSE 100 is a limited index and looking at a different index may give a different result.
Can someone explain what I have done wrong? as it has currently knocked my belief in the stock market.

Thanks

skid112

did you include dividends? and then re invested dividends?

dunstonh

You have left out the dividend yield that would have been paid on the shares. That would be another 2-3% a year. The index doesn't include that.

Also, for the last 14 years, the FTSE100 has been a poor performer compared to the wider stockmarket.

Over 20 years (as that is the max my software will go back), £100 would have grown to:

FTSE100 (index only) : £300.69
FTSE all share (index only) : £313.40
Invesco Perp Income fund (picked as it is highly popular, it was not the best): £1187.17
Halifax Liquid Gold: £169.68
RPI: £201.53
Property (using Halifax house price index): £433.21

In reality, the liquid gold is below average on savings rates but RPI would be much closer to the mark (its currently 4.3%).

If I do the same over 14 years, I can include FTSE 100 and FTSE all share trackers in there as they haven't had a long history.

FTSE100 (index only) : £233.11
FTSE all share (index only) : £245.02
Invesco Perp Income fund : £775.16
L&G UK Index trust: £359.98
L&G UK 100 index trust: £267.07
Halifax Liquid Gold: £123.02
RPI: £145.55
Property: £316.05

So, you can see that income from shares has a vital part to play in stockmarket investing. A GEB doesn't get the dividends so you can see what that they are missing out on and FTSE 100 and all share trackers are cheap but low potential (as these examples are after charges on the funds). Although better than savings in both examples. Property is not as high as perhaps many would have expected. It beat the FTSE indices' but didn't come close to a well run managed fund.

ViksB

No, I simply used the average FTSE value in July of each year. I didn't include any dividends.
This is probably the difference, any idea how I could find a value for the dividends??

Thanks
Viks

Saltyboy

As you say, The FTSE100 is a limited Index. Being an Index it does not include any dividends that you would have received from investing in the companies. If you include the value of these each year and compound them up then you will see a much greater difference in your figures.

Whilst the impact of the BoE base rates will effect the stockmarket (it effects the cost of borrowing for companies) it is only one of many factors and so it will be only have a loose correlation.

You would expect the stockmarket to outperform over the medium to long term. The stockmarket is much wider than the FTSE100 and can be a good home for some of your money.

ViksB

Assuming a 2% dividend this takes the FTSE up to £1054 for £100 invested in 1984 opposed to the £661, as much better figure.

Thanks

Jonbvn

What your calculations do show is the need for diversity in anyone's portfolio.

I like to use the the cricket team analogy. Any winning team needs a good mix of batsmen. You need someone like Kevin Pieterson to get you a lot of runs quickly (comparable to a high risk investment) and someone like Geof Boycott, when times are tricky (comparable to low risk savings).

JDinho

The FTSE 100 & All Share indices are calculated on Total Return basis, but i don't think the values are freely available on the web. These would defintely provide a for comparable figures.

Darth_Calculus

You would expect the return on shares to be higher than the BoE rates, as the BoE rate reflects the return on a risk free investment. Since shares do carry some risk, it would be natural to expect a higher return than what is generated from sticking the money in a savings account.