The FTSE 250 often gets overlooked compared to its older sibling, the FTSE 100. The index is home to the 101st to 350th largest businesses on the London Stock Exchange, containing mostly mid- and even small-cap enterprises. And these are precisely the types of stocks I’d pursue to build a chunky portfolio when starting from scratch.
The barriers to entry aren’t that high
Decades ago, investing in the stock market was a bit of a palaver. Brokerage accounts were notoriously expensive, with high commissions acting as a barrier for households that weren’t earning vast sums. Yet today, the landscape has drastically changed.
Higher levels of competition and innovation have reduced the cost of investing drastically. Transaction fees are slowly becoming negligible, with some platforms being entirely commission-free. The Stocks and Shares ISA for British investors has been launched to wipe out taxes from the equation. And the ability to buy fractional shares has eliminated the minimum investment requirements for companies with lofty stock prices.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
As such, it’s perfectly possible to kick start a portfolio with as little as £200, perhaps even less. Of course, such a small amount of capital isn’t likely to yield life-changing wealth. However, by investing small sums on a regular basis for the long run, that changes drastically.
The power of compounding
Investing £200 a month is the equivalent of £2,400 a year. Therefore, after two decades, a portfolio would have received £48,000 in savings. That’s certainly not bad. But an investor who managed to replicate the FTSE 250’s 11% average annual return over the same period would actually be sitting on a portfolio worth £173,128 – 3.6 times more!
This is the beauty of compounding. As the value of an investment increases, an 11% gain translates into a far larger monetary value with each passing year. And if an investor kept this snowball effect going for another decade, the same portfolio would reach £560,900!
Making an 11% gain
The idea of having close to half a million for retirement is obviously exciting. However, this calculation is reliant on an investor actually achieving an 11% average gain.
It may seem obvious to simply invest in a FTSE 250 index fund to mimic the returns of the growth index. However, just because it’s delivered this gain in the past doesn’t mean it will continue to do so in the future. As such, investors may have to turn to a stock-picking strategy to keep up.
By selecting individual businesses, there’s no longer a limit on how much an investor can gain, like with an index fund. However, the opposite is also true. A poorly constructed portfolio of badly selected stocks may end up underperforming a benchmark index. It could even end up destroying wealth rather than creating it.
As such, investors may end up with considerably less than expected if they’re ill-prepared. Stock picking is a time-consuming process that requires careful research and analysis – something that our Share Advisor team specialises in. But when executed correctly, it opens the door to potentially superior returns that can accelerate the journey to financial freedom.
