What does a FTSE 100 rally really mean?

The FTSE 100 index has rallied strongly today following last week’s sharp falls and that usually gets some media attention.

After all we all like to see the value of our pensions and investment rising.

Some commentators believe there is a very real chance that the FTSE 100 index may rise to above 7,000 points before the end of 2013.

This would mean that it was at the highest historical level it has ever been, having previously reached 6,950.6 in 1999.

But there are some important things to note;

• The FTSE 100 index is a pretty “blunt instrument” it after all represents the top 100 UK companies by capitalisation. The UK stock market is about so much more than just the top 100 firms;

• Most investors (and this includes the majority if not all of our clients) are not just invested in the FTSE 100. They will have diverse portfolios invested in cash, fixed-interest securities (such as Gilts and Corporate Bonds) commercial property funds and equity funds from different parts of the world;

• The FTSE 100 index rises and falls depending upon a lot of factors such as the economic well being of not just the UK but other nations on the planet. It is also driven up or down by “investor sentiment” in other words confidence or otherwise in the future profitability and value of shares in these firms;

• Most of the profits of the FTSE 100 firms comes not just from trading in the UK but profits from activity around the world.

We should enjoy the fact that the value of our portfolios have risen but not get too carried away by this. The value of shares can fall as well as rise of course.

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