If a 40-year-old put £500 a month in FTSE 250 shares, here’s what they could have by retirement

The FTSE 250 has delivered Footsie-beating returns over the last 20 years. Can it keep going? Royston Wild takes a look.

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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.

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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%).

Created with Highcharts 11.4.3Bloomsbury Publishing Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

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.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

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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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing Plc. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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