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Which is the better investment now, the FTSE 100 or the FTSE 250?

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The FTSE 250 passed a key moment this week, reaching its highest level ever. In doing so, it’s trashed the FTSE 100 over the past decade and more. Today, I want to examine a number of specific reasons investors might choose stocks from one index over the other, and why conventional ideas might not necessarily make sense.

I’m going to start with safety. The conventional wisdom is that the huge companies in the FTSE 100 are the ones to go for to preserve capital. After all, Warren Buffett’s first rule of investing is: never lose money. And he knows what he’s talking about.

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As a general rule of thumb, I’d say the idea that FTSE 100 stocks are safer makes sense. But then, the FTSE 100 is home to Rolls-Royce and International Consolidated Airlines, both of which have lost a packet for their shareholders. In the FTSE 250, meanwhile, we find some investment trusts like Caledonia Investments, which has returned a solid 150% over the past decade, with safety through diversification.

Top dividend stocks

What about dividends? Surely the FTSE 100 is the place to secure those. Well, again, there are some painful exceptions. The FTSE 100’s banks, for example, all suspended their dividends in 2020. They’re coming back now, but yields are still low.

Down in the FTSE 250, City of London Investment Trust has raised its dividend for more than 50 years in a row, with yields of around 4% to 5%. Financial trading platform CNC Markets is also in same mid-cap index, and we’re looking at yields of around 7%.

Cheap growth shares

Now, growth investing must be the preserve of the FTSE 250, mustn’t it? The index has, after all, been soaring ahead of the FTSE 100. But in the top index we find Ocado, which has recorded more than 1,000% growth since flotation in 2010. Much of that came before the company made it into the top index, sure. But with a market cap of more than £15bn now, it’s also shown some impressive growth since arrival.

Penny shares? Won’t there be more of those in the FTSE 250 than the FTSE 100? In this case, it looks like a big yes. Right now, there’s only one FTSE company with a share price less than a pound. It’s Lloyds Banking Group, at 44.5p.

The FTSE 250, meanwhile, is home to a decent handful of penny shares. There’s Petropavlovsk at 20p, and Hammerson at 34.7p, among 14 stocks trading at less than 100p.

So, FTSE 100 or FTSE 250?

So what does all this tell us about the best index to invest in? Whether I seek income, or growth, or specific sectors, how do I know which index to go for? Personally, I don’t think choosing by index offers me much help at all. A stock market index is no more than the sum of its parts. And it’s the parts, the individual shares, that I buy.

So I just look for great shares, in the FTSE 100, FTSE 250, or wherever they’re listed. I go for companies I’m positive about with a long-term view, and there really are lots of those to choose from.

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Alan Oscroft owns shares of City of London Inv Trust and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group and Ocado Group. 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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