Why I’d drip-feed £500 a month into cheap FTSE 250 shares in an ISA starting today

Buying FTSE 250 shares in an ISA on a regular basis could be a sound long-term move, in my opinion. Starting today could produce attractive returns.

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Buying FTSE 250 shares could prove to be a profitable long-term strategy. The index continues to trade lower than it did a year ago. This suggests there may be opportunities to buy undervalued shares in high-quality businesses.

Furthermore, the index’s larger weighting towards the UK compared to the FTSE 100 could provide it with scope for a strong recovery. The vaccine rollout may prompt a return to improved operating conditions for many UK-focused businesses. That makes a regular investment in domestic businesses relatively profitable in the coming years.

Buying FTSE 250 shares today

FTSE 250 shares could offer good value for money because the index trades lower than it did prior to the 2020 stock market crash. In fact, it’s currently around 5% down on its price from a year ago. Some stocks within the index are trading at significantly larger discounts to their prices 12 months ago. This could mean that FTSE 250 stocks offer good value for money at the present time.

Looking ahead, the UK economy is widely anticipated to return to strong growth over the long run. It declined by nearly 10% in 2020, and the 2021 lockdown is likely to weigh on its performance in the first part of the year. But its prospects as the coronavirus pandemic wanes could become increasingly positive.

Since the FTSE 250 relies on the UK for around half of its income, versus less than a third for the FTSE 100, it could be a sound means of benefitting from a likely UK economic recovery.

The track record of the stock market

Buying FTSE 250 shares has been a relatively profitable move in the past. Clearly, this is no guarantee of future returns. The past is never repeated perfectly in future. However, the index has returned around 9% per annum on a total return basis over the last 20 years. This suggests that buying shares in mid-cap companies on a regular basis could prove to be a sound move over the long run.

Even if an investor matches the stock market’s performance over a similar timeframe, they could turn a realistic monthly investment into a surprisingly large sum. This could make a positive impact on their financial situation over the long run.

For example, investing £500 per month at an annual return of 9% would produce a portfolio valued at around £335,000 over a 20-year time period.

As such, with many FTSE 250 shares trading at low prices versus their historic averages at the present time, now could be an opportune moment to start buying them. As ever, there’s no guarantee of any positive future returns from any company.

However, with a solid track record of growth, low valuations and a likely recovery for the UK economy ahead, mid-cap shares could well offer impressive total returns in the coming years.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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