Why is the FTSE 100 always reaching “record highs?”

Only last month, Sky News ran a headline saying “FTSE 100 closes at record high” and The Standard wrote “London’s FTSE 100 beats record to hit all-time high in ‘surprising’ rally.”

It appears, every couple of months, we see stories in the media about the FTSE 100 closing at a new record high.

This prompts the question: “If it is always going to go up, why is everyone not investing in it?”

Hidden reasons for the FTSE 100’s success

The FTSE 100’s regular highs are driven by several factors.

Firstly, inflation plays a key role.

Over time, rising prices increase the nominal value of companies’ revenues, which naturally inflates share prices.

However, these gains are not always “real” once adjusted for inflation.

Secondly, many FTSE 100 companies are multinationals earning significant revenue overseas.

This global exposure often shields the index from UK-specific challenges.

When the pound weakens, for example, their overseas earnings are worth more, boosting the index.

The index itself also influences its performance.

Underperforming companies are replaced with stronger ones during regular reviews, meaning the FTSE 100 always reflects the top-performing businesses.

Finally, central bank policies like low interest rates and quantitative easing have pushed investors towards equities, increasing demand for shares and driving prices up.

Should you invest in the FTSE 100?

While the headlines may suggest endless growth, these highs should be viewed within context outlined above.

Inflation, index composition, and global factors all contribute, so it is crucial to take a balanced approach to investing.

That said, historically the FTSE 100 has performed exceedingly well with an average total return for the index being 7.1 per cent over the last decade.

Ultimately, the decision is one of small-growth-low-risk vs. high-growth-potential-high-risk.

If you need help deciding, speak to our team.