The FTSE 250 market crash caused by the coronavirus means that many shares in the index trade on low valuations.
As such, now could be a great time to invest £2k or any other amount in FTSE 250 stocks. Over the long run, these companies may have the potential to produce high returns that could improve your financial prospects.
Investing in the FTSE 250
The FTSE 250 is the second-largest index in the UK. The 100 largest listed companies on the London market make up the FTSE 100. Meanwhile, the FTSE 250 contains the next 250. The FTSE 350 is a combination of these two indexes.
Together these two indexes make up the vast majority of the London market.
The FTSE 100 offers more international diversification. However, the FTSE 250 has more growth potential. Smaller companies make up the index, which are no less important than their larger counterparts. But due to their size, they have much more growth potential.
The index also has more exposure to fast-growing sectors. There are more technology companies in the FTSE 250, for example.
The higher number of growth stocks means that the FTSE 250 has historically outperformed the FTSE 100. Over the past few decades, the mid-cap index has returned around 4% a year more than its blue-chip peer.
Clearly, the outlook for the global economy is uncertain at present. As such, it is unlikely that the FTSE 250 will produce a positive return in the near term.
Nevertheless, over the long run, the index has always recovered from significant setbacks. It has then gone on to generate new all-time highs.
That implies that the FTSE 250 is very likely to generate positive returns for investors over the long run.
That being said, it is difficult to tell at this point which companies will survive the current crisis. Therefore, the best strategy could be to buy the whole index or a diverse basket of stocks. That way, you can increase your chances of benefiting from a recovery while reducing the risk of potential losses.
One of the best ways to buy the whole FTSE 250 is through an index tracker fund. It offers exposure to all of the companies in the index at a very low cost. This means a passive tracker could prove to be one of the best ways to benefit from the index’s long-term recovery potential while minimising risks and costs at the same time.
Therefore, whether you have £2k or £20k to invest, now could be the right time to buy the FTSE 250. The index’s recovery potential and scope to outperform other assets, such as the FTSE 100, could dramatically boost your financial prospects.
After what has been a challenging time for investors, this could be the perfect way to play the recovery over the next few years.
Rupert Hargreaves 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.