Since the start of the year, both the FTSE 100 and the FTSE 250 have performed well. So much so, recent buyers of passive investment vehicles like trackers and exchange-traded funds can be forgiven for feeling rather smug.
By yesterday, both indexes had increased 13% from their respective valuations on 31 December. The question is, will recent positive momentum continue?
With an interest rate cut in the UK now considered more likely than not, it’s possible shares will remain the go-to option for those looking for places to store and grow their wealth.
Despite recent form, the UK also remains relatively cheap compared to some markets with a Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 16.3. Having recently broken records (again), the S&P 500 looks prohibitively expensive by contrast, on a CAPE ratio of almost 30.
That said, nothing is guaranteed when it comes to investing. Concerns over slowing global growth coupled with the ongoing trade spat between China and Donald Trump could see even attractively priced markets reverse before the end of 2019.
There’s also the small matter of whether Jeremy Hunt or Boris Johnson gets the keys to Number 10 — the result of which could heavily influence the manner of our departure from the EU. This is particularly relevant for those considering investing in the FTSE 250 since its constituents have greater exposure to our economy. Ominously, many economists are already forecasting a recession is very likely in the event of a no-deal Brexit.
By contrast, a further weakening in sterling as a result of political and economic concerns could actually be beneficial to the FTSE 100, since a huge number of its members generate the majority of their earnings from outside of the UK. In short, it’s a hard one to call.
But does it really matter?
Whether you believe the FTSE 100 and FTSE 250’s recent form should be treated with caution or not really depends on how long you plan to stay invested.
Like everyone else, I’ve can’t say for sure where the market is heading in the immediate future. I am, however, far more confident about where we’ll be decades from now.
Research shows that equities are easily the best performing assets over the long term. Over the last 20 years (which, of course, included the dot com crash and the financial crisis), the FTSE 100 has returned 4.5%. As a result of being composed of smaller companies able to grow at a faster rate, the return from the FTSE 250, over the same period, has been double this.
So, if you’re in for the long haul, what either index decides to do next is pretty much irrelevant. What matters more, in my view, is keeping costs low and not placing all your eggs in one basket.
With this in mind, those looking to get exposure to the FTSE 100 or the FTSE 250 could do worse than buy the cheap, highly-liquid funds offered by either Vanguard or iShares (Blackrock).
The former’s exchange-traded fund tracking the FTSE 100 has an ongoing charge of 0.09%. The latter’s equivalent costs just 0.07%. For the FTSE 250, the ongoing charges are 0.1 and 0,4% for Vanguard and iShares, respectively.
Notwithstanding, it’s also worth bearing in mind a risk-conscious investor’s exposure to either index should only represent a proportion of their portfolio. For maximum diversification, consider buying a global equity fund as well.
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Paul Summers 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.