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In the movie High society, Frank Sinatra asks, “Who wants to be a millionaire?”. Celeste Holm, who plays with Sinatra, says, “No.” Well, unlike Sinatra’s counterpart, I am. So is property or the FTSE 100 more likely to give me a seven-figure fortune?
In 1956, when High society was released, the average UK house price was £2,280 and the FTSE 100 did not exist. It was not until January 3, 1984 that the index of the 100 largest listed companies was created, with an initial value of 1,000.
The FTSE 100 closed last week at 7,281 – up 628% since its inception. This corresponds to an average annual growth of 5.2%. Over the same period, inflation averaged 2.9% each year, so the real return (after adjusting for inflation) from the Footsie was 2.3% per annum.
But that’s only half the story.
The key to building significant wealth is to reinvest any dividends received.
Analysis by IG found that £10,000 invested in the FTSE 100 in 1986 would have grown to £53,394 by the end of 2019. By reinvesting all the dividends received, the original £10,000 would have grown to £195,852. The reinvestment strategy increased the average annual return by another 4.3 percentage points.
Unfortunately, I didn’t start investing in the FTSE 100 in 1984.
It is also important to maintain commitment over a long period of time. The FTSE 100 fell 31.3% in 2008 and 14.3% in 2020, so long-term investments help smooth out the inevitable downturns.
So, how has the life of brick and mortar increased over the same period?
According to the data from All-State Construction Society, the average UK house price in 1984 was £29,675, which is £114,707 in today’s money. The average house price is now £270,452, meaning the average annual growth rate between 1984 and today has been 2.4% after inflation.
This is marginally better than the FTSE 100 if there were dividends no reinvested, but the return is lower than the return obtained by implementing the dividend reinvestment strategy.
Unfortunately, I did not buy the house in 1984.
But it is important to remember that there are large regional differences in housing prices, so buying in the right area is very important. The above figures refer to an average home, wherever it may be.
Also, a bank will lend you money to buy a house, but won’t lend you money to buy stocks.
And of course you can’t live in the FTSE 100 fund tracker.
I could benefit from both property and shares by investing directly in the UK’s biggest builders or in a property investment trust.
But in 2021, Rakesh Bissundil published a paper examining the relationship between house prices and the stock market, and found that severe volatility in one market is likely to coincide with turmoil in the other.
It is also important to remember that past performance is no guarantee of future performance. The growth we have seen may not continue in the future.
So, unfortunately, I may have left too late to become a millionaire. And this is the biggest lesson of investing – in the stock market or real estate – start early.
To quote Frank Sinatra again, “Unfortunately, I’ve had a few . . .”