The FTSE 250 is an index of the 101st-350th largest companies listed in the UK, and it’s a hive of high-yield, high-growth stocks. And these are exactly the type of stocks I need to transform an empty portfolio into one that generates more than £1,500 a week in passive income.
Kicking things off with… nothing
These days it’s easy to start investing without any initial capital. I can open an account on most major investment platforms with nothing. I can even open an ISA — which is great for passive income because dividends receive within the wrapper are tax free — with little or no cash at all.
But, eventually, when I actually want to start buying stocks and shares, I’ll need to have some cash. The best way to do this is through regular, ideally monthly, savings. Setting up automatic savings is particularly useful as it ensures I keep up with my scheduled savings plan.
Moreover, consistency helps accumulate funds over time, allowing me to take advantage of compounding returns. I’l also need to be patient and take a long-term approach. My monthly savings aren’t going to turn into a huge sum overnight.
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Compounding
So I know I’ve got to get saving. These days, thanks to the emergence of low- or no-fee platforms and fractional shares, I can start investing with as little as £30 a month. However, if I’m targeting a larger income, I’m going to want to invest more. For the sake of this example, I’m going to say £200 a month.
When investing for the long run, I’m going to want to build my portfolio around the idea of compound returns. This is a powerful investing strategy that involves earning returns on both my original investment in addition to the returns I’ve received previously. In other words, it requires me to reinvest my returns every year. That way, each year, the returns should be bigger than the previous year.
FTSE 250 returns
Since their inceptions, the FTSE 100 and FTSE 250 have delivered an average annual total return of 7.2% and 10.6% respectively. As we can see, the medium-sized company index has delivered considerably higher growth rates than the blue-chip index.
In other words, the FTSE 250 can potentially offer higher returns than the lead index as it consists of medium-sized companies, often with more room for growth compared to the more established companies we find on the FTSE 100.
While there is a higher rate of failure on the FTSE 250, it’s entirely possible, if I pick correctly, that I can achieve an index-beating 12% annualised return. Of course, the issue is picking the right stocks. That’s why it really pays to do my research, or investing in people to do the research for me.
Assuming a 30-year investment timespan, continued savings of £200 a month, annual reinvestment, and 12% annualised return, at the end of the period I’d have a portfolio that could deliver £78,523 a year. That converts to £1,510 a week. Not bad when starting from nothing.
