With the FTSE 250 having posted an annualised gain of just 2% over the last four years, many investors may be unsure about its investment potential at the present time.
After all, its UK focus could mean that it underperforms internationally-focused indices at a time when Brexit remains a known unknown.
However, there could be a number of buying opportunities within the index, while its dividend prospects may be stronger than some investors realise.
As such, now could be the right time to buy FTSE 250 stocks in order to overcome a State Pension that amounts to just £168.60 per week.
Unlike the FTSE 100, the FTSE 250’s focus is on companies that generate the majority of their revenue from within the UK. This means that its outlook is more closely tied to the UK economy than it is for the FTSE 100. While this may cause a degree of volatility in the short run due in part to Brexit, it could present buying opportunities for long-term investors.
In fact, with the index having delivered relatively disappointing performance over the last four years, it could now offer a wide margin of safety. Indeed, now could prove to be an opportunity to buy a number of mid-cap shares while they trade at discounts to their intrinsic value.
Since the FTSE 250 index has recorded an annualised total return of over 9% in the last two decades, its long-term growth potential appears to be significant. It could therefore be a sound means of generating a nest egg that is used to provide a passive income in retirement in order to supplement the State Pension.
Although the FTSE 250’s dividend yield of 3.2% may not sound like a worthwhile income return from investing in the stock market, it is possible to generate a significantly higher return from a diversified portfolio of mid-cap stocks.
In fact, 70 stocks in the FTSE 250 currently offer yields in excess of 4%. This suggests that while they may exhibit greater volatility than larger companies, it is possible to obtain a worthwhile income at the same time as potentially benefitting from the index’s growth prospects. And with there being such a large range of choice for income investors, it is possible to build a portfolio with relatively low company-specific risk through diversification.
Although the FTSE 250 has disappointed in the last few years, it now appears to offer good value for money. Its strong track record of growth over a long period indicates that it could be a sound means of putting in place a nest egg for retirement.
Furthermore, for investors seeking a passive income, there appear to be a number of stocks within the index that could offer an appealing income return in order to overcome the modest State Pension in retirement.
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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.