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Want to retire rich? I’d buy the FTSE 250

For most people, the best way to build wealth for the future is to invest your money. But investing can be a time consuming and challenging process. Even the professionals get it wrong more often than not, and you have to be willing to spend hours analysing potential investments.

With this being the case, I think if you want to retire rich, the best approach is to buy a low-cost tracker fund. When it comes to deciding which index to track, investors are spoilt for choice. Today, there are hundreds of tracker funds on the market as well as ETFs, which track lesser-known and more bespoke baskets of stocks.

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With all these options available, I think the best course of action is to keep things simple. That’s why I think a FTSE 250 tracker fund is the best place for your money.

Tracking the market

Unlike the FTSE 100, the FTSE 250 is more of a domestic-focused index. It’s comprised of the 250 largest companies on the London market, although it doesn’t include any companies that fit into the FTSE 100. The FTSE 350 contains the constituents of both indexes.

The big advantage the FTSE 250 has over the larger blue-chip index is size. Companies in the Footsie 100 are some of the largest in the world, and they are relatively constrained and how fast they can grow by the law of large numbers.

On the other hand, those in the FTSE 250 are smaller and usually have more room to grow. This makes it more of a growth index than the FTSE 100, which is better for income seekers with its 4.5% dividend yield.

Growth index

They say a picture says a 1,000 words and, in this case, the numbers do the same. All we need to do is look at the returns of the FTSE 250 compared to the FTSE 100 over the past decade to see that the smaller index offers more in the way of growth.

Specifically, over the past decade, the FTSE 250 has produced an average annual return of around 10%. By comparison, the FTSE 100 has returned about 7% per annum. Three percentage points of performance might not seem like a massive gap at first, but over the long term, it makes a huge difference to wealth creation.

£1,000 invested at an interest rate of 7% would grow to be worth £7,900 after three decades. The same £1,000 invested at 10% would grow to be worth £18,700 over the same time frame.

Making a million

At this rate of return, it wouldn’t take much to turn a small monthly savings contribution into a large pension pot worth £1m, or more, according to my calculations. Indeed, I calculate a saver would need to put away just £300 a month for 35 years to accumulate a £1m pot, assuming an average annual rate of return of 10%. That’s from a standing start.

With £100,000 of pension savings already in the bank, it’ll only take 20 years to make a million, assuming a monthly deposit of £300 and an annual return of 10%.

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Rupert Hargreaves owns no share 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.