Buying discounted stocks from the FTSE 250 today could be a profitable long-term strategy. The index continues to trade 25% lower than its peak in October 2021, with many of its constituents still being dragged down by ongoing economic uncertainty. In fact, just a few weeks ago, it dropped to its lowest point since the start of 2023.
However, as disastrous as this seems on the surface, this volatility may have created an excellent entry point for patient investors. And injecting £500 a month into these companies could unlock substantial wealth in the long run. Here’s how.
Investing before a recovery
The FTSE 250, like other leading UK indices, has experienced multiple crashes and corrections since its inception three decades ago. So far, it’s proven to have a perfect track record of recovering from even the direst financial situations. And that’s a trend I believe is unlikely to change.
On average, the FTSE 250 has delivered an annualised return just shy of 11% since it launched in October 1992. And that’s even after all the latest rounds of volatility. At this rate, investing just £500 a month could propel a portfolio into seven-figure territory, given sufficient time.
In fact, when starting from scratch, the journey to becoming a millionaire could potentially be completed in just 27 years. However, by capitalising on the sorry state of the index today, this timeline could be significantly accelerated.
Throughout its history, some of the best-performing periods for the FTSE 250 have been just after a crash or correction. The momentum created by a market recovery can be a powerful catalyst for compounding. And even if it results in just an extra 2% of annualised gains, that’s enough to wipe out three years from the waiting time.
Risks and expectations
As exciting as this prospect sounds, there are some important caveats to cover. Firstly, trying to predict when a recovery will kick off is exceptionally difficult. It might have already started, or it may still be several months away. If it’s the latter, injecting all my money into FTSE 250 shares right now could result in further near-term losses.
That’s why drip-feeding £500 a month is likely a more sensible strategy. That way, if shares continue to fall, there’s more money available each month to snap up even better bargains.
However, it’s also important to highlight that past performance is usually a poor indicator of future results. Just because the index has delivered double-digit returns before doesn’t mean that trend will continue over the next couple of decades. But even if it does, then there’s the risk of another poorly-timed crash or correction coming along to derail portfolios once again.
All of this is to say that investing in the stock market has its risks. Yet it’s proven to be one of the best wealth-building tools in the long run. That’s why I think the risks are worth taking.