The FTSE 100 is at a record high. So will I keep buying?

Last year was a nightmare for investors around the world, as stocks and bonds fell for the first time since the global financial crisis (GFC) of 2007-09. This made 2022 investors the worst year since 2008. But the FTSE 100 avoid this storm.

FTSE 100 hits record high

At the end of 1999, the FTSE 100 closed at 6,930.2 – a record high close. But the stock market collapsed in 2000-03, more than halving the Footsie’s value. The index then more than doubled in mid-2007, before collapsing again during the GFC.

Finally, the index reached a fresh high of 7,877.45 on May 22, 2018. But it dipped again and took almost five years to surpass this mark. On Friday, the record was 7,906.58 points, before closing at 7,901.8.

In other words, the index has gained 14% in over 23 years. That’s a compound annual growth rate of 0.57% – a small return for almost a quarter of a century of risk taking.

But FTSE 100 companies often pay decent cash dividends. Adding these cash payments to, say, 3% per year increases the annual return to about 3.5%. That’s better. Also, no one invested all their money at the peak, so most UK shareholders should be better off than that figure. Phew!

Bet on Footsie

Since the GFC, our family portfolio has been heavily invested in US equities. Since the S&P 500 has outperformed the other major indexes since (+181.5% since the end of 1999), I like the asset allocation.

But at the end of 2021, I repeatedly warn that US stocks – especially technology companies – are very overvalued. So we reduced our US exposure and invested more in the very cheap FTSE 100. This helped us avoid the worst market convulsions in 2022. But we still lost money, making losses in the low single digits.

The FTSE 100 faces two problems

For me, the main reason the FTSE 100 is doing so well in 2022 is its composition. In short, the index lacks the mega-cap tech stocks that dominate US stock indexes, as tech accounts for a small proportion of the Footsie’s value.

However, the index’s strength can – over time – become its greatest weakness. The first problem is that Footsie is dominated by the old economy sectors, including oil & gas, mining, banking and other financials.

Therefore, the FTSE 100 is dominated by value stocks, rather than growth stocks. And when investors turn away from growth and return to value, then the index can take a beating. This is likely to happen as the global economic recovery picks up after interest rate hikes.

The second problem is that the index is concentrated in only 10 mega-cap stocks. Together, these top 10 account for nearly £984bn of the index’s total value of £2.14trn. It is about 46% of the total. Thus, almost half of the performance of the index depends on only 10 companies, which is the risk of concentration.

Despite these concerns, I am still very bullish on the prospects for the FTSE 100. Despite being at a record high, it looks very cheap to me and offers a good dividend yield. Therefore, I will continue to buy in 2023-24, or until the price does not look attractive.