Investing in shares can be a bumpy ride when economic conditions worsen. But over time, buying stakes in FTSE 100 and FTSE 250 companies has proven a lucrative strategy for millions of people.
The Footsie has delivered an average annual return of 7.5% since it began in the mid-1990s. The FTSE 250 has an even more impressive record, producing a yearly average of 11%.
These sorts of return illustrate why investing in stocks and shares can be a better long-term option than simple saving. Share prices can go down as well as up. But spreading capital across a wide variety of companies can help individuals reduce risk, and eventually pave the way for life-changing returns.
Life-changing returns
Let’s say that I have a £20,000 lump sum to invest in a FTSE 250 tracker fund. I like this idea as exposure to hundreds of different companies reduces the impact of company- or industry-specific problems on my returns.
If the index continues delivering that 11% average yearly return I would, after 30 years, have turned that £20k into a cool £534,162. This illustrates the wealth-building power of compounding, where I earn money on any reinvested dividends as well as on the initial sum.
Two top hacks
Whether drawing down a percentage of this each year, or using it to buy an annuity, this sort of return could set me up with a healthy passive income for the rest of my life.
But while impressive, I have two ‘cheat codes’ I believe could help me make an even better return. The first is to invest something extra each month to magnify the compounding effect over time.
Let’s now assume I use an extra £200 a month to buy FTSE 250-listed shares. Using the same timescale and rate of return I would have improved that £534,162 to a whopping £1,095,065. That’s almost double what I’d have made just with that £20k initial investment.
The second wealth-boosting hack would be to select individual stocks to buy. I could supplement this with the addition of a tracker fund. Alternatively, I could diversify my portfolio without using a fund by buying a wide range of companies.
A FTSE 250 stock on my radar
For example, I could target index-beating returns by buying high dividend stocks. The theory is that the large shareholder payouts they deliver would supercharge my compound returns as they are reinvested.
Tritax Eurobox (LSE:EBOX) is one high yielding company I’m considering buying today. At current prices of 51.2p, it carries a mighty 8.4% forward yield, comfortably beating the FTSE 250 average of 3.4%.
On top of this, the business — which lets out warehouses and distribution centres in Mainland Europe — trades on a forward price-to-earnings (P/E) ratio of 11.4 times.
This is well below its five-year average of 19.6 times, and suggests a share price rating could be in order that boosts my capital gains.
Current turbulence in the eurozone economy poses a threat to Tritax in the near term. But the long-term outlook remains highly encouraging, as phenomena like evolving supply chain management and e-commerce growth drive demand for storage and distribution hubs.
