Next year the FTSE100 will be 40 years old. What can its history reveal about long-term investing?

The FTSE100 includes many of Britain’s best-known brands, such as Marks & Spencer, Barclays Bank and Sainsbury’s, sitting alongside many large, international corporates. Although the index is rebalanced regularly, just over a quarter of the founding members are still listed.

Tracking how this index has evolved offers some important insights for investors.

Original investors have received a compound annual return of 5.2% thanks to growth of 660% since its inception (to the end of September 2023). But there has also been significant volatility. Investors need to be able to stay invested for the longer term to ride out the shorter-term price movements.

What’s more, since the index launched just three of the original companies have gone bust, underlining the fact that larger companies can be more stable and less risky than smaller start-ups.

However the performance of the FTSE100 shows stock markets don’t always deliver positive returns – even over longer periods. This may reflect another key investment lesson: the importance of diversification. Around 40% of the FTSE100 is made up of energy, healthcare and banking stocks – while fewer than 1% are tech companies.

Investors should diversify where possible, by geography, sector and size of company. Investing across different stock market indices can help achieve that.

Although the FTSE100 delivered returns of around 1% in the first two decades of this century, this is just a reflection of the share price of its constituent companies. It does not take account of the dividend payments which remain an important part of total returns, particularly for a mature index such as the FTSE100.