The Motley Fool

Retirement saving: Why the FTSE 250 could double your money

The FTSE 250 (INDEXFTSE:MCX) has generated significantly higher returns than the FTSE 100 over the last two decades. It’s recorded total returns of over 9% per annum, while the FTSE 100’s have been just under 5% per year in the same period.

Some investors may therefore argue that the mid-cap index lacks value compared to its large-cap-focused peer. Such a strong performance over an extended time period could indicate it’s now overvalued in the eyes of some investors. However, in the long run, further outperformance from the FTSE 250 could be ahead. And in doing so, it could offer a major boost to your retirement savings plan.

Brexit questionmark

While the FTSE 100’s companies generate around 75% of their income from international operations, in the FTSE 250 that figure is much closer to 50%. This means that the mid-cap index is more closely correlated to the performance of the UK economy.

With Brexit talks providing a high degree of uncertainty at the present time, it could therefore be argued that the index is trading at a lower price level than it otherwise would be. Investors may be pricing-in potential challenges for the UK economy, with the outlook relatively difficult to forecast given the fluidity of negotiations with the EU.

With investor sentiment towards UK-focused shares generally weak at present, the FTSE 250 may offer good value for money on its current dividend yield of 2.7%. While its yield is generally in-line with its historic average, it could be argued that it deserves to trade at a higher price level (and lower yield) given the prolonged bull market experienced in global equities.

Mid-cap stocks

With an investment in the FTSE 250 taking less than eight years to double (including dividends) over the last two decades, it appears to offer impressive growth potential. Certainly, it seems to offer greater growth prospects than the FTSE 100, simply because it’s comprised of mid-cap stocks which generally have stronger growth potential than their larger peers.

Although large-caps may have greater size, scale and stability versus smaller stocks, their mid-cap peers generally offer more impressive earnings growth potential. As smaller entities, they may have scope to grow organically, as well as through acquisitions, and this can lead to a stronger share price performance in the long run. And with their valuations often not attracting the same premium as their larger peers due to perceived higher risk, it’s unsurprising that they have outperformed the FTSE 100 in recent years.

Future potential

While retirement saving opportunities are wide ranging, a simple and potentially highly successful option is the FTSE 250. It seems to offer a ‘sweet-spot’ between large, lower-risk stocks and more speculative small-caps. Having delivered high returns in the last 20 years, its future potential appears to be mightily attractive given its current valuation.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.