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Forget the Cash ISA! The FTSE 250 is flying high and that’s what I’d buy today

Cash is king, people used to say, but they don’t any longer. There’s nothing kingly about leaving your money in a standard savings account or Cash ISA, where you’ll get an average return of less than 1% a year.

With inflation at 1.5%, any money you leave in cash is only going to slide in value, in real terms. The longer you leave it there, the less it will be worth when you finally access it.

Think long-term wealth

Everybody needs a rainy day reserve of cash for emergencies, but your long-term wealth will fare much better in the stock market, which has delivered an historical average return of 7% a year.

Now the FTSE 100 is often the go-to index for those who want to keep things simple by investing in a low-cost tracker. If that tickles your fancy, a simple index fund, such as the iShares Core FTSE 100 ETF, might be a good place to start.

However, you should consider looking beyond the UK’s index of blue-chips, because the next 250 companies size-wise have also been putting on a bit of a spurt lately.

The FTSE 250 is packed with large- and medium-sized British companies, ranging from big names such as EasyJet, Just Eat and Direct Line Insurance Group, to lesser known lights including SIG, Bakkavor Group and Sanne Group.

Track the index

Some of the companies are on the way down from the FTSE 100. Others are on the way up and, one day, may become blue-chips themselves. If you buy a tracker such as the iShares FTSE 250 UCITS ETF, you’ll get exposure to all of them.

You may prefer to buy individual FTSE 250 stocks. Here are two you could buy for 2020, but remember that buying direct equities is far riskier.

The FTSE 250 is more exposed to the fortunes of the UK economy than the FTSE 100, because the UK’s biggest companies generate more than three quarters of their earnings overseas. So if the UK economy struggles, the FTSE 250 could be hit hard. Yet, impressively, it has shrugged off Brexit concerns to hit an 18-month high, standing at 20,940, at time of writing.

The FTSE 250 is up more than 30% over the last five years, three times the growth on the FTSE 100, which rose just over 10%. It won’t always outperform like that, a no-deal Brexit and slowing economy could hit it hard. The FTSE 100 has more ballast, because bad Brexit news pushes down the pound, which drives up the value of overseas earnings generated on the index, once converted into sterling.

You get income, too

The FTSE 100 offers a slightly higher level of dividend income, with a current yield 4.53%, but the FTSE 250 isn’t too shabby, at 3.17%. That’s three times the return on a standard Cash ISA, with all capital growth on top.

The FTSE 250 tends to do better during bull markets, when investors are likely to take a risk on smaller, nimbler, fast-growing companies. In times of trouble, they lean towards more defensive, established FTSE 100 names, notably pharmaceutical companies and utility stocks.

Too many investors overlook the FTSE 250 and miss out on a great opportunity. So think twice about that Cash ISA.

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Harvey Jones owns shares of iShares FTSE 100. 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.