Investing in the FTSE 250 may seem like a bad idea following what happened in 2022. After all, during the stock market correction, it fell by nearly 30% in the space of a year.
Yet despite this recent performance, when taking a long-term perspective, drip-feeding £250 a month into the index could still potentially lead to a far more comfortable retirement.
Focusing on the long term
The FTSE 250 is home to the 101st-250th largest publicly-traded UK companies listed on the London Stock Exchange. Yet with most industry titans residing in the FTSE 100, this index primarily consists of mid-cap and even small-cap stocks.
Consequently, this opens the door to significantly higher levels of volatility. But there is a major advantage. Smaller, successful businesses have more room to grow. So it shouldn’t be surprising that the FTSE 250 has delivered significantly higher average returns.
In fact, even after last year’s double-digit dip, the average annualised total gain over the previous 30 years stands at 10.6%. By comparison, the FTSE 100 has only mustered 7.2%. As such, investors with a stronger stomach for short-term volatility operating on a long-term time horizon could drastically increase their retirement savings.
Investing £250 monthly into the FTSE 250
Let’s assume the index will continue its historical growth trajectory. In this scenario, investing £250 a month for the next 30 years could lead to a substantial nest egg, even when starting from scratch.
| Year | Total Deposits | Accrued Interest | Portfolio Value |
|---|---|---|---|
| 1 | £3,000 | £150.13 | £3,150.13 |
| 2 | £6,000 | £650.88 | £6,650.88 |
| 5 | £15,000 | £4,669.34 | £19,669.34 |
| 10 | £30,000 | £23,008.53 | £53,008.53 |
| 20 | £60,000 | £145,300.37 | £205,300.37 |
| 30 | £90,000 | £552,829.98 | £642,829.98 |
According to the Office for National Statistics, the average pension pot in the UK is £107,300. Needless to say, the prospect of having six times that amount by simply putting £250 a month into a low-cost FTSE 250 index fund is quite exciting.
Of course, inflation means that £107k will likely be a higher figure in 30 years’ time. So how could I potentially grow my pot to much more than £642k? By researching and buying individual FTSE 250 stocks whose growth could outstrip the index as a whole and turbo-charge my nest egg
And this paves the way for a far more luxurious retirement lifestyle.
Every investment carries risk
Over long time horizons, the stock market, on average, goes up. That’s because shares represent businesses which grow and elevate economies to new heights, given sufficient time. But the journey isn’t a straight line.
Businesses and, in turn, economies operate in cycles of expansion and contraction. This effect bleeds into the stock market, usually in the form of a correction like the one seen last year. In more extreme situations, it can evolve into a full-blown crash. Sadly, this risk comes with the territory of investing. And years’ worth of growth can be snuffed out in mere weeks.
Given sufficient time, the market always recovers before reaching new heights. And investors prudent enough to capitalise on cheaper valuations can propel their portfolios even further during an eventual stock market recovery.
But three decades is plenty of time for multiple crashes and corrections to emerge. And depending on the timing of these events, an investor’s FTSE 250 portfolio could be worth significantly less than expected come retirement.
Nevertheless, the risk can be managed through prudent investing and sensible asset allocation, making the potential rewards a worthwhile pursuit.
