So, finally, the FTSE 100 has broken through its 1999 high. What next for this index? Will it breach 7,000?
Well, often, these numbers take on an almost mystical significance. But my view is that you should see the big picture.
You need to see the whole constellation
The FTSE index has had an impressive start to the year, after a disappointing 2014. But you shouldnt think about how indices like this are progressing from week to week or month to month. Instead of looking through your telescope to observe just one star in the sky, what you should do is zoom out and look at the whole constellation.
The fact that the FTSE 100 is only as high as it wasat the turn of the centurygives you an idea that shares were incredibly expensive all those years ago, and that now they are rather cheap.
But there area few things thatdistort the picture. Notably, the fact that the constituents of the FTSE 100 change from year to year. The number of oil, gas and mining companies has increased a lot over the past decade. This has coincided with the commoditiessupercycle of the past few years.
Now, in many industries it is worthwhile, and sometimes essential, to follow fashion. But not with investing. The high proportion of FTSE 100 companies thatare commodities businesses wasa positive during the commodities bull market, but during this bear market it is a negative.
This is the ideal time to invest in the FTSE 100
Another variable is the relative performance of blue chips compared with mid and small caps. Whereas the FTSE 100 has barely moved since 1999, the FTSE 250 (the UKs mid-cap index) has nearly tripled. Now part of this reflects the higher growth of small companies, but part of this also shows that, over the past few years, small- and mid-cap companies have been favoured over blue chips.
I suspect this means that, over the next decade, the balance will tilt back towards large caps. This is another reason why I think the FTSE 100 looks cheap and is likely to rise over the long term.
Lets see whats been happening overseas. The Dow Jones Industrial Average is a whole 57% higher than where it was at the turn of the century. This suggests to me that US markets are rather expensive, and I would generally reduce my investments Stateside.
Somy central message isthat the FTSE 100 looks cheap compared to many other indices, and that this is the idealtime to invest in a broad range of growing and high-yieldUK blue chips thatyou think will prosper over the next decade, or, if you prefer,to buy a FTSE 100 tracker.
Will the FTSE 100 breach 7000 this year? Well, it may possibly.But whether it does or not is not something I will worry about.
Understanding future trends, and analysing the fundamentals of companies and markets is crucial to successful long-term investing; itwill determine whether youreally domake the riches that you are hoping for.
If you really want to be seriously rich then your first step should be to read our guide to making your fortune in the markets. Just click on this link to read “So you are aiming to become seriously rich”.
Do NOT buy these stocks
Theres lots of opportunity out there in todays market but theres also PLENTY of danger.
In anticipation of Champion Shares PROs brief opening to new membership a few short weeks from now, the analyst team behind the Motley Fools most exclusive service has agreed to share 3 stocks they believe YOU would do best to avoid.
PRO research is rarely made available to the general public. To find out the names of these “don’t buy” companies — and to claim your 100% FREE copy of Steer Clear Stocks right away — simply click here.