Over the long term, investing in the FTSE 250 has proved an effective way to build wealth. Since 2004, the UK’s second-most-prestigious share index has delivered an average annual return of nearly 9%.
The past isn’t a reliable guide to future returns. But if the FTSE 250 can maintain its impressive performance, how much could a 40-year-old investing £500 monthly in the index make by the time they reach retirement age?
Growth + dividends
The FTSE 250’s success is thanks in large part to its composition of mid-cap shares. Companies in this bracket typically have more room for earnings growth compared to the larger, more established firms in the FTSE 100, often resulting in significant share price gains.
But the index isn’t just about growth. Thanks to a good concentration of established and financially robust companies, it is also a reliable provider of decent dividend income.
It’s not as high as the Footsie’s forward average of 3.7%. But the FTSE 250’s prospective dividend yield of 3.5% isn’t far off.
A near-£30k passive income
A blend of healthy capital gains and passive income means the FTSE 250’s delivered an average annual return of 8.9% during the last 21 years.
If this continues, a 40-year-old investing £500 a month in an index tracker fund could — once they reach the State Pension age of 68 — have a portfolio worth £739,874. That figure excludes broker-related costs and fund charges.
But here’s the thing: I’m not convinced the FTSE 250 can continue delivering the sort of return it has in recent decades.
How so?
A much larger percentage (roughly 55%) of the index’s earnings come from UK versus, say, the more internationally-flavoured Footsie. And so returns are highly sensitive to economic conditions at home.
Unfortunately the UK looks set for a prolonged period of low economic growth, worsened by higher business costs following October’s Budget. Inflation is also ticking higher, while major structural problems (like low productivity and high public debt) persist.
Such issues have cooled the FTSE 250’s average annual return to just 1.5% over the past five years. Looking ahead, I’m not expecting a vast improvement (if any).
A top FTSE 250 stock
That’s not to say the index is a bad place to invest, though. While I believe investors should think about avoiding FTSE 250 tracker funds, I think buying individual shares is still worth serious consideration.
Bloomsbury Publishing (LSE:BMY) is one such share I feel is really worth checking out. During the past decade, it’s delivered a stunning 17.8% average annual return.
That’s more than three times better than the FTSE 250’s average over the same period (5.3%).
The blockbuster Harry Potter range of books remains a huge money spinner, but it’s not the only string to the publisher’s bow. Its consumer division is packed with bestsellers and award winners, particularly in the fantasy fiction field.
Bloomsbury also has a successful academic publishing arm that it continues to grow through acquisitions. Combined, its consumer and academic units delivered revenues and profits growth of 32% and 58%, respectively, between February and August.
Weak consumer spending poses a danger to sales right now. But I’m confident Bloomsbury could remain a great investment option for long-term investors.
