I’d drip-feed £250 a month into the FTSE 250 and aim to retire in comfort

Investing £250 a month in the FTSE 250 index could build a portfolio for retirement that’s much bigger than the average pension pot. Here’s how.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A senior group of friends enjoying rowing on the River Derwent

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

YearTotal DepositsAccrued InterestPortfolio 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.

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.

More on Investing Articles

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Here’s what a FTSE 100 exit could mean for the Shell share price

As the oil major suggests quitting London for New York, Charlie Carman considers what impact such a move could have…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

Shell hints at UK exit: will the BP share price take a hit?

I’m checking the pulse of the BP share price after UK markets reeled recently at the mere thought of FTSE…

Read more »

Investing Articles

Why I’m confident Tesco shares can provide a reliable income for investors

This FTSE 100 stalwart generated £2bn of surplus cash last year. Roland Head thinks Tesco shares look like a solid…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

£20,000 in savings? I’d buy 532 shares of this FTSE 100 stock to aim for a £10,100 second income

Stephen Wright thinks an unusually high dividend yield means Unilever shares could be a great opportunity for investors looking to…

Read more »

Investing Articles

Everyone’s talking about AI again! Which FTSE 100 shares can I buy for exposure?

Our writer highlights a number of FTSE 100 stocks that offer different ways of investing in the artificial intelligence revolution.

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

3 top US dividend stocks for value investors to consider in 2024

I’m searching far and wide to find the best dividend stocks that money can buy. Do the Americans have more…

Read more »

Investing Articles

1 FTSE dividend stock I’d put 100% of my money into for passive income!

If I could invest in just one stock to generate a regular passive income stream, I'd choose this FTSE 100…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Forecasts are down, but I see a bright future for FTSE 100 dividend stocks

Cash forecasts for UK dividend stocks are falling... time to panic! Actually, no. I reckon the future has never looked…

Read more »