The value of the FTSE 250 has fallen significantly since the start of the year. The UK’s second-biggest index has shed 2,500 points so far in 2022.
So, is now a good time to invest in the FTSE 250? Let’s take a look.
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How did the FTSE 250 perform during Q1?
During the first quarter of the year, the FTSE 250 fell 10.5%. Take a look at a recent performance graph, and it becomes apparent that the index suffered continued falls throughout January, February and March.
The first week of March was a particularly bad month for the UK’s second-largest index. Between 1 and 7 March, the FTSE 250 dropped from 20,500 to 19,169. This represented a 6.5% fall within the space of a week.
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Why has the FTSE 250 fallen this year?
The FTSE 250 comprises the 101st to the 350th biggest companies listed on the London Stock Exchange, based on market capitalisation.
As a result, constituents of the FTSE 250 are typically younger, less established companies than those listed in the FTSE 100. (In contrast to the FTSE 250, the FTSE 100 has risen slightly since the year began).
While many FTSE 250-listed companies have huge potential for growth, members of the index can typically struggle during times of economic uncertainty.
Of course, there has been a lot of economic uncertainty during the first three months of the year. Rising inflation, questions surrounding the post-pandemic world and the war in eastern Europe have all contributed to this.
Put simply, markets don’t like uncertain times. This is one big reason the FTSE 250 has suffered particularly badly in the early months of 2022.
Is now a good time to invest in the FTSE 250?
Given recent falls in the FTSE 250, you might be thinking that now is a good time to invest in the share index. After all, the index has previously demonstrated that it has the potential to surge over a short period of time. In 2021, for example, the FTSE 250 climbed 14.6%, beating FTSE 100 returns last year (14.3%).
However, these returns came just a year after the FTSE 250 suffered an almighty blow thanks to the onset of the Covid-19 pandemic. In 2020, the index lost 6.8% of its value. Plus, it could have ended the year even lower had it not experienced a mini-resurgence towards the end of 2020.
So, given its recent history – a 6.8% loss one year and a 14.3% gain the next followed by a hefty 10.5% fall (so far) in 2022 – you’d be forgiven for thinking the index is unpredictable, to say the least.
However, while looking at the previous performance of the index can be interesting, always remember the number one rule of investing: past performance should not be used as an indicator of future returns. To put it another way, basing investing decisions on how share prices have performed in previous years is a fool’s endeavour.
In a similar vein, it’s also worth bearing in mind the drawbacks of trying to ‘buy the dip’. This refers to buying stocks after they fall, with the expectation that they’ll rise in future. While this may seem a straightforward investing strategy, always bear in mind that stocks that have recently fallen, including those in the FTSE 250, could yet have further to fall.
To learn more about this topic, see our article that explores whether ‘buying the dip’ is a good idea.
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How can you invest in a share index?
If you’re keen to invest in a share index such as the FTSE 250, you have two options.
You can either buy a FTSE 250 exchange-traded fund (ETF) to benefit from the collective performance of an index or invest in individual constituents of a particular index.
To buy an ETF, you’ll need to find a share dealing platform and choose the appropriate fund. Hargreaves Lansdown is a popular option for this due to its low fees.
Or, if you wish to buy shares in individual constituents of an index, you can simply buy shares through a share dealing account.
As with any investment, it’s important to recognise that the value of your investments can fall as well as rise. For more need-to-knows, take a look at our investing basics guide.