Since the State Pension is becoming less appealing as the age at which it starts being paid in set to increase over the long run, FTSE 250 shares could offer investors the chance to boost their income in retirement.
Certainly, FTSE 100 companies offer higher yields in general, and may come with less risk as a result of them being more mature and geographically diverse. But with mid-cap shares appearing to offer good value for money, and having superior growth prospects, they could make a bigger impact on an individual’s retirement savings prospects.
For individuals who are close to retirement, or who are already retired, taking a greater amount of risk may not be a worthwhile move. After all, they will be reliant upon the income from their investments, and may not be able to overcome the potential volatility which is a feature of mid-cap investing.
However, for those individuals who have a long investing career ahead of them, mid-cap shares could offer significant investment appeal. They have a track record of delivering higher growth rates than their larger peers, since in many cases they are less mature businesses. This means that they may have greater scope to expand versus their larger peers, and this could make a greater difference to an individual’s nest egg upon retirement.
As mentioned, FTSE 250 shares are generally more focused on the UK economy than their larger peers. This could mean they are riskier, since they do not have the geographical diversity of larger companies. At a time when the Brexit process is difficult to accurately predict, this may mean that the performance of mid-cap shares is somewhat disappointing in the near term.
However, for long-term investors, this could create a buying opportunity. Investors already appear to have factored in many of the risks facing the index, since it has a dividend yield of over 3% at the present time. And with consumer disposable incomes rising in real terms, GDP growth being positive despite Brexit-related risks, and unemployment levels being low versus their historical levels, now may prove to be a good time to invest in UK plc.
Clearly, mid-cap shares may have balance sheets that are riskier than their larger peers. But with such a wide range of choice, it may be possible for investors who are concerned about debt levels, for example, to unearth a portfolio of mid-cap stocks with low levels of leverage.
With FTSE 250 shares generally being less well-known than their FTSE 100 peers, many investors may wish to simply buy into a tracker fund for the mid-cap index. Doing so over the last decade would have generated a superior performance to the FTSE 100.
With there being a number of stocks offering low valuations and high growth rates, it may be possible to outperform the index over the long run. Doing so could lead to even higher returns, which could make the FTSE 100’s performance seem somewhat disappointing in comparison. As such, now could be the right time to consider mid-cap shares for the long term.
Financial Independence, Retire Early – that must sound good to anyone. However, not everyone realises it’s a possibility! That’s why we at The Motley Fool put together an in-depth report written by top FIRE expert Mark Bishop. What’s more, it’s free for all to download and read – click here to receive your complimentary copy!