Market Thinking

making sense of the narrative

Not as bad as it seems…

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As we see another hit to Equities today, I note comments already arriving saying the FTSE100 is now below where it was 20 years ago. However, this (like many things) is not as bad, or indeed what, it might at first seem. For this ignores the importance of dividend income and the power of compound interest.

Consider instead the Chart below, which compares the FTSE with the Total Return Index on the FT All Share.

Long Term Equities are about compound dividends

We can see that while the headline number for the FTSE is now 84% of what it was exactly 20 years ago, the total return index for the All Share is 210% of where it was.

The useful rule of thumb for compounding – the rule of 72, tells us that divide 72 by our yield and it gives the number of years it takes to double your capital. Curently, using the 12 month dividend yield on the FTSE100 it will take 11.5 years to double your money. Sure, they might cut the dividend, (maybe) but if you put it in a 10 year gilt, it would take 303 years.

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