Although it’s sometimes overlooked and underloved, the UK stock market has generated decent average investment returns over the years – and it’s one of the oldest stock markets in the world.
Sadly, part of the reason investing in the UK hasn’t been so popular in recent years is that the average stock market return for the UK doesn’t look too impressive on paper. Especially when compared to major US indices like the S&P 500. But the major reason for this is dividends, and we’ll dive into this in more detail later.
Don’t want to read the whole article? Here is the average UK stock market return in a nutshell:
- The average return of the 100 biggest UK-listed companies, measured from the FTSE 100, which is used as a proxy of the UK stock market return, has been 5.4% per year (not reinvesting dividends – from 1984 up until the end of 2022)
- When considering dividends reinvested, the average return of the 100 biggest UK-listed companies, measured from the FTSE 100, which is used as a proxy of the UK stock market return, has been 7.48% per year (with dividends reinvested – from 1984 up until the end of 2022)
- UK Stock Market returns have been lagging when compared with other economies, such as the US Stock Market Returns (compared later in the article)
Keep reading if you’re keen to get a better understanding of the average UK investment returns, what a typical portfolio performance could look like and how this compares to global investment returns.
Average investment returns
Before we start looking at specific details around average UK investment returns, it’s worth quickly covering what this refers to and how it’s defined to ensure we’re on the same page. There are many different ways performance and returns can be measured.
Put simply, average investment returns relate to the profit or gains made over a certain period of time. In one way or another, everyone is investing to grow their money and understanding average investment returns is one of the best ways to measure past performance. And it’s a decent metric to get an overview of a particular investment.
The average return from any investment can be impacted by things such as:
- Macroeconomic conditions (like interest rates and inflation)
- Management of a company
- Financial performance
- Whether dividends are paid
- Sector or industry competition
- Investor sentiment (confidence)
Essentially, there are plenty of direct and indirect factors that could end up impacting the average return of an investment. This is why you’ll often see major historical events (economic, social and political) mentioned when talking about past average investment returns.
The most recent prominent example is COVID-19. Anyone talking about stock markets and typical average investment returns from around 2020 will probably mention the pandemic to give you some context.
UK stock market and average returns
We’re going to explore the average investment return of the UK stock market along with the typical investment return for UK investors, but first, we’ll quickly explain how the UK market works.
UK Stock Market Organisation
The UK stock market is made up of companies listed on stock exchanges based in Britain. The major exchanges are:
- The London Stock Exchange (LSE)
- Alternative Investment Market (AIM)
Where things can sometimes confuse the average UK investor is that when people refer to the ‘UK stock market’, sometimes they’ll be referring to an index rather than the actual stock exchange.
An index is basically a big list containing a particular number of companies. Using an index makes it easier to measure things like the average return, which is helpful for UK investors and those elsewhere.
The most popular indices that help track the UK market include:
- FTSE 100
- FTSE 250
- FTSE 350
- FTSE All Share
There are plenty of other variations, but for the most part, when people mention UK market performance or average return, they’re usually talking about the FTSE 100 – made up of the 100 biggest UK firms (by market capitalisation).
The same happens over in America. Often, when you hear people mention US stock market performance or look to calculate average returns, they’ll be looking at the S&P 500 index. This works in a similar way to the FTSE 100, except it contains 500 companies.
In both situations, the FTSE 100 and the S&P 500 can give investors a decent idea about the health of the UK and US markets. Having these indices also makes it much easier to track things like the average investment returns over time for these markets.
FTSE 100 performance and returns
Typically, most investors who want broad exposure to the UK stock market will use some sort of fund that tracks the FTSE 100. So, if we look at how the FTSE 100 has performed over the years, we can get a decent idea about average investment returns for UK investors.
As mentioned briefly in the introduction, the FTSE 100 is slightly tricky to look at for returns because dividends play such a big role. So, there are 2 ways to look at performance:
- Price return – this is simply how much the index has grown in price over time.
- Total return – this is a fairer measure of performance because it includes reinvested dividends.
The FTSE 100 became a proper measure of the UK stock market in 1984, and since then, up until the end of 2022, the price return was 645.2%. This means that on an annualised basis, a yearly average investment return of 5.4%.
However, if you look at the same period but also take reinvested dividends into the calculation, the FTSE 100 total return is more than double this figure, reaching 1514.92%. And on an annualised basis, this would mean an average UK investment return of 7.48%.
To show you this in a visual way, here’s how a £1,000 investment into the FTSE 100 would have performed from 1999 to 2019 if you did or didn’t reinvest the dividends:
Typical investment returns for UK investors
Using all the information and details about historic investment returns for the FTSE 100 and the UK stock market, we can get a decent idea of what the typical investment return would look like for a UK investor.
Now, one of the biggest factors will be when exactly someone made the investment. But, based on price return and total return of the FTSE 100, here’s what a £10,000 investment would look like over various time periods (taking the average annualised return.
Average UK stock market investment returns
|Return of £10,000 FTSE 100 UK investment
|Average price return (5.4%)
|Average total return (7.48%)
As you can see, the small percentage change from reinvesting dividends doesn’t make a huge impact in the early years. Still, over time, this would have a drastic effect on the typical return you’d make by investing in the UK market.
Boosting average investment returns for UK investors
Although you could end up with a decent return by investing in the UK stock market, this is limiting your possibilities as an investor.
Many economies outside the UK have seen plenty of growth over the years, and if you only invested in the UK, you’d be missing out on these potential returns.
The most obvious example is the US stock market. Whereas the FTSE 100 had an annualised total return of 7.48% from 1984 to 2022, the S&P 500 had an annualised total return of 10.15% over a much longer period (from 1957 to 2022).
Over longer periods of time, this percentage difference would make a huge difference to the return a typical investor could expect. For example, here’s how a £10,000 investment would compare between the FTSE 100 and the S&P 500 over 40 years based on those averages:
- FTSE 100 – $197,413.12
- S&P 500 – $569,928.49
Keep in mind that because the S&P 500 operates in USD, there are potential implications that currency movements can have on your investments. This is one benefit to keeping your investments within the UK. But if you do look abroad, just bear in mind that the currency exchange between USD and GBP, for example, can have an impact on your returns over time.
The difference that just a few percentage points can make is pretty crazy. You can clearly see that investing outside the UK could have a significant impact on the typical returns for the average investor over time.
But, the US isn’t the only market available. These days, it’s easier than ever to access just about every international market you could imagine.
International diversification has the potential not only to boost your average investment return over long periods but also to help spread your risk and possibly reduce the volatility of your investment portfolio.
Average return of UK investments compared to global markets
Here’s a look at how the UK has performed compared to benchmarks for international stock markets (in terms of returns over a 5-year period, correct at the time of writing).
You can see that in terms of growth, the UK stock market hasn’t been the best performer, but it also hasn’t been the worst and it’s typically been a much less volatile market.