Regularly investing in the FTSE 250 could help investors drastically improve their retirement prospects. Obviously, the UK’s flagship growth index isn’t the only option when building a nest egg. And pension funds, along with fixed-income instruments, offer a lower-risk alternative that may be more suitable for some individuals. But for those comfortable with a bit of volatility, it may be a terrific option.
Retiring wealthy with an index
The index is home to the 101st to 250th largest enterprises on the London Stock Exchange. As such, it houses several promising enterprises on their way to becoming new industry leaders. Investors who prefer a more hands-on approach may decide to pursue a stock-picking strategy to find and buy these future winners. However, this is often easier said than done. And incorrectly identifying these firms could be a costly mistake.
Fortunately, while stock picking executed well can provide above-average returns, it isn’t the only way to build long-term wealth in 2024. By allocating capital into a low-cost index fund, investors can mimic the future returns of this benchmark while simultaneously building instant diversification. Alongside a variety of individual stocks, it can help to reduce portfolio risk.
Since its inception, the FTSE 250, even after the recent market downturn, has delivered an average gain of around 11% a year after dividends. Assuming this upward trajectory continues moving forward, investing just £250 a month over the course of a 40-year career could yield a portfolio worth £2.15m!
Following the 4% rule, this is sufficient to generate a retirement income of £86,000. For reference, the median average salary in the UK is currently only £29,700. And I think it’s fair to say that earning nearly three times more than the average Joe can provide a far more luxurious lifestyle.
Keeping expectations in check
Obviously, earning almost ninety grand a year without having to lift a finger is an exciting prospect. However, it’s important to note that this number comes with a lot of unrealistic assumptions.
Just because the FTSE 250 has provided 11% gains in the past doesn’t mean it will continue to do so. And even if it lags by just 1%, that’s enough to wipe £500,000 off an investor’s nest egg. But even if things continue as they have done, 40 years is more than enough time for multiple crashes and corrections.
While it’s true these events will create lucrative long-term buying opportunities, they will also likely temporarily derail a portfolio. And depending on the timing of these events, investors may have to settle with far less than expected, or delay retirement for several years. And these risks are only amplified for those pursuing a stock-picking strategy.
All of this is to say that the FTSE 250 provides investors with the opportunity to build substantial wealth. However, it’s not guaranteed and, therefore, essential to prepare for these worst-case scenarios.
