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£5k to invest? I’d buy the FTSE 250 to retire on

If you have £5,000, or any other amount to invest today, buying the FTSE 250 could be a great choice.

Over the past 35 years, the index has produced a total annual return for investors of 12%. At that rate of return, even a small sum invested today could become a substantial nest egg over the long run. 

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There are some other advantages in buying the FTSE 250 for the long term as well.

FTSE 250 returns 

The FTSE 250 is the UK’s second primary stock index after the FTSE 100. While the FTSE 100 is made up of large international blue chips, the FTSE 250 has a domestic focus. The average size of the companies that make up the index is also much smaller

Smaller stocks tend to outperform their larger competitors over the long run. That seems to explain why the FTSE 250 has returned 12% per annum compared to the FTSE 100’s 7% in the past 35 years. 

The index is also weighted by market capitalisation. This means the best performing companies rise to the top while struggling, shrinking businesses fall. In effect, this makes the FTSE 250 a growth fund. 

As such, while past performance is never necessarily a guide to future returns, it seems likely that the index’s returns will continue to outpace the FTSE 100’s. 

Easy to buy

As well as the FTSE 250’s potential for higher returns in the years ahead, the index is also easy to own. Today there is a range of funds that track the index. Investors can buy one of these funds at the click of a button.

In addition, most online stock brokers now offer a regular investment plan, allowing investors to set up a monthly direct debit to buy an index fund. 

Most of these funds don’t charge much. The lowest cost FTSE 250 tracker on the market at the moment charges less than 0.2% in fees per annum.

In comparison, the average fee charged by actively managed growth funds (where an investment manager picks the stocks they like best) is more than 1%. 

The impact higher fees can have on your savings cannot be underestimated.

For example, an investor who buys a growth fund with an active manager and charges will pay £266 in fees over a decade on an investment of £1k. That’s assuming an annual return of 12% over the period. With costs of just 0.2%, the total paid in fees would be only £55. 

Buy and forget 

All of the above suggests that the FTSE 250 could be the perfect core or foundation investment for your retirement fund. Many investors choose to keep the some of their investments in a fund and reserve some for investing in individual stocks. While you might be able to earn higher returns buying individual stocks, that approach does require time and effort. As such, it might not be suitable for some investors. Buying the FTSE 250 is a straightforward, stress-free way to invest for the future.

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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.