Investing in FTSE 250 shares can be an excellent idea for long-term investors.
The average return on these UK stocks since the early 1990s stands at a stunning 11%. This is far better than the return I’d have got by putting my money in a low-yielding savings account.
I’d also have been able to grow my wealth above the rate of inflation by buying these FTSE 250 stocks, meaning my investments would have risen in value in real terms. This is not the case with savings accounts, where the my purchasing power would have been eroded in recent decades by this ‘hidden tax.’
Past performance is not a reliable indicator of what will happen. But here’s why I plan to buy more FTSE 250 shares for my Stocks and Shares ISA.
Cash vs stocks
Putting money in something like a Cash ISA is considered a ‘safe’ option by most people. If I put £300 in a savings account, I know this will still be there when I next check my balance.
I won’t get this assurance by parking my cash in a Stocks and Shares ISA. The prices of shares can go up, but they can also go down. My balance could decline within seconds of me making my £300 deposit.
However, using savings accounts is also risky in certain respects. I’ve mentioned above that using one of these low-paying accounts leaves me vulnerable to the impact of inflation. I could leave myself open to not making enough money to fund my retirement.
A £841,355.92 retirement pot
If FTSE 250 shares, for instance, continue providing that 11% annual return, I would — after 30 years of investing £300 a month — come out with a healthy £841,355.92.
That’s more than three times the £249,677.59 I would have made if I put that money in the highest-yielding instant access Cash ISA instead.
Furthermore, this near-£250k return would assume that this product (offered by Shawbrook) keeps its 5% savings rate locked for the next 30 years. This is a highly unlikely situation in my view: the Bank of England looks poised to start cutting interest rates very soon.
A premier pick
I can minimise the risk of share investing, too, by putting my cash in companies with strong defensive qualities.
Premier Foods (LSE:PFD) is one such stock I’m actually hoping to buy when I next have cash to invest. This FTSE 250 share has provided a steady long-term return thanks to its leading role in the ultra-stable food production sector.
The resilient nature of food demand provides the company with excellent earnings visibility at all points of the economic cycle. But this is not all. Its ownership of five-star brands like Mr Kipling cakes and Bisto gravy gives it the edge over most competitors, and therefore added sales predictability.
Premier Foods’ portfolio has other notable advantages. It is built across various product categories, which in turn protects overall earnings from any change in consumer tastes. And finally, products like instant noodles are cheap to buy and then make, which makes them especially popular in tough times.
On the downside, the company is vulnerable to any pickup in input costs. Sales can also disappoint if new product launches fail to ignite. But on balance I think Premier Foods could be an excellent way for me to generate long-term wealth.
