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Forget buy-to-let: I think FTSE 250 shares can help you become an ISA millionaire

Even though the outlook for the UK economy has been highly uncertain in the current year, the FTSE 250 has still risen by around 12% since the start of 2019.

Over the same time period, UK house prices have moved 2.9% higher. While that’s also a strong result based on the prospects for the wider economy, as well as how weak consumer confidence has been this year, it’s significantly lower than the returns posted by the index.

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Looking ahead, the FTSE 250 could continue to outperform house price growth due to its more appealing valuation. Furthermore, it also offers greater diversity that’s more accessible to a wider range of investors. As such, it could be a superior means of aiming to become an ISA millionaire.

Return potential

While the FTSE 250 has risen sharply in 2019, it continues to offer good value for money relative to its historic levels. It currently has a higher-than-average dividend yield in excess of 3%.  This indicates there could be further growth ahead for the index, with many of its members having valuations that suggest they offer a wide margin of safety.

By contrast, house prices may have limited scope to rise significantly higher. The average house price to average income has been at the upper end of its historic range for several years. Prior to this, the last time it reached its current level was immediately before the financial crisis. At that time, house price declines followed a period of growth. Although the same level of challenges may not necessarily be ahead, house prices may nevertheless fail to keep pace with their fast-paced growth of recent years.

Risk reduction

With the average UK house price around £237k, it’s difficult for UK investors to build a portfolio of properties in order to reduce risk. They are likely to need several million pounds to reduce the impact of void periods, property repair issues and other risks that could negatively impact on their cash flow in the short term.

Investing in the FTSE 250, meanwhile, is highly accessible. Anyone can open an ISA and then start buying a range of stocks in a variety of industries in order to reduce overall risk. Although this will still leave market risk in place, which has the potential for a downturn in the wider stock market, it will limit the potential ill effects on the wider portfolio of a specific stock experiencing a challenging period.

This could mean the risk/reward ratio for an investor is further enhanced by investing in mid-cap shares. Not only could they offer higher returns in the long run, they may have a more attractive risk profile. As such, now could be the right time to buy FTSE 250 shares, rather than seek to make a million on buy-to-let properties.

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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.