While investing in FTSE 250 shares may not provide the same degree of excitement as buying a lottery ticket, it could be a better destination for your spare capital.
The index has recorded an annualised total return of over 9% during the last two decades, while it provides international diversity that helps to reduce overall risk. Furthermore, a number of mid-cap shares appear to offer wide margins of safety that could make them highly investable for the long term.
With the stock market becoming increasingly accessible due to lower costs, now could be the right time to ditch buying lottery tickets and instead increase your investment in FTSE 250 companies.
While the FTSE 250 is more reliant on the performance of the UK economy than is the case with the FTSE 100, around 50% of the mid-cap index’s income is derived from outside the UK. This means that while issues such as Brexit could lead to an uncertain outlook for the index, the prospects for the world economy could act as a counterweight over the coming months.
As such, the growth potential for the index remains high at a time when the emerging economies of the world, as well as the US, are expected to post strong GDP growth. They could provide FTSE 250-listed companies with growth opportunities that lead to a continued rise in the index’s price level over the coming years.
Furthermore, the FTSE 250 appears to be significantly undervalued at the present time. Its dividend yield is in excess of 3%, which is high compared to its historic average. Moreover, it is possible to purchase a wide range of mid-cap shares that trade on relatively low valuations at the present time – especially since many of them offer improving financial outlooks.
As such, for an investor who has a long-term view, buying unloved FTSE 250 shares could prove to be a shrewd move. They may produce high volatility and even paper losses in the short run. But, over the coming years, they could deliver continued growth and rising dividends as they have done over recent decades.
With a reduction in dealing costs and commission across share-dealing providers over recent years, investing in the stock market has never been cheaper. This makes it more accessible to a wide range of investors, which could mean that it is worth considering investing even modest amounts in FTSE 250 shares on a regular basis.
In addition, the emergence of mobile apps that allow you to invest spare change in the stock market could be appealing. They may provide a starting point for small investors to benefit from the growth potential of the stock market, with the chances of improving your financial prospects being significantly higher than they would be from using spare capital to purchase a lottery ticket.
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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.