Since it reached its peak early in the year 2000 the FTSE 100 index has been in a secular bear market. Since then it has fallen 12%, but that is only in nominal terms. In real terms, that is, adjusted for inflation, the FTSE has actually fallen 39%.
The chart below shows the FTSE 100 index between January 1999 and April 2012. The blue line is the one everyone is use to seeing, as it’s simply the price performance in nominal terms. The red line however, is the real price performance, i.e. the price adjusted for the rate of inflation.
FTSE 100 Index: January 1999 to April 2012
Source data: Monthly closing prices taken from Yahoo Finance. Inflation data from the ONS. NB: I have used the Retail Price Index (RPI), because it’s a more complete measure of inflation since it includes mortgage interest payments.
As you can see, in nominal terms, (the blue line) the FTSE looks relatively flat. However, once adjusted for the official rate of inflation (the red line), we can see just how poorly the UK’s top companies have performed.
Buy & hold can be hazardous to your wealth
Buy and hold investing only works when the asset you are holding is in a secular up-trend, i.e. a bull market. However, the world’s major stock averages, such as the FTSE and the Dow are not in a bull market, they are in a bear market.
Investors must be aware of the market environment in which they are investing. In this environment a passive buy and hold strategy, especially one utilising index trackers, will lose you money, potentially quite a lot.