I’d drip feed £500 a month into the FTSE 250 to aim for a million

Investing £500 in a FTSE 250 index fund each month can be a great way to build wealth, but it might pale in comparison to picking stocks directly.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in the FTSE 250 could be the key for investors to improve their retirement prospects. The UK’s flagship growth index has been quite volatile over the years. But it’s also paved the way to significantly higher returns versus its larger sibling, the FTSE 100.

In fact, it’s been the difference between earning an average 8% annualised yield versus 11% since inception. And when compounded over decades, that can amount to a much larger portfolio. Let’s take a look at how investing £500 a month into the FTSE 250 could translate into a £1m portfolio for patient long-term investors.

The journey to a million

A difference of 3% in annualised returns doesn’t sound like much. But in the world of snowballing compounding, that’s an enormous difference. To demonstrate, here’s what a brand-new portfolio would roughly look like if that £500 sum had been invested in the FTSE 100 and FTSE 250 over the last 30 years.

YearsFTSE 100 (8%)FTSE 250 (11%)
5£36,738£39,759
10£91,473£108,499
15£173,019£227,345
20£294,510£432,819
25£475,513£788,067
30£745,180£1,402,260

As shown, after 30 years of compounding, a 3% difference translates into an almost doubling of wealth. And for those looking to retire in style, a low-cost index fund seems like the answer. Unfortunately, this calculation relies on a fairly generous assumption that the FTSE 250 will continue to deliver its historical return. And sadly, there’s just no guarantee that will happen.

In fact, if we zoom in to just the last decade, the FTSE 250 has actually grossly underperformed, delivering annualised returns of close to a mere 6%. It’s a similar story for the FTSE 100 as well. And at this rate, the journey to a £1m portfolio could take as much as 40 years.

Stock-picking to the rescue!

There’s no denying the advantages that index investing provides. It automates a lot of the process, allowing investors to build their long-term wealth passively. However, by picking individual stocks instead of relying on funds, investors open the door to market-beating returns as well as avoiding fund management fees.

Kainos Group (LSE:KNOS) is a prime example of this. Since the technology digitalisation expert joined the public markets in 2015, shareholders have received a total return of 432%. That’s the equivalent of earning close to 20% per year. And earning this rate of return for three decades would grow a £500 monthly investment to be worth over £11m!

In more recent years, Kainos’s share price has experienced a bit of weakness. Higher inflation and interest rates have delayed customer projects requiring its digitalisation services. And the reorganisation of one of its largest customers, the NHS, saw earnings take a hit.

Yet with the macroeconomic environment steadily improving, 2025 could be a far more lucrative year for Kainos. And at a forward price-to-earnings ratio of 17.5, the shares seem to be fairly priced given its growth potential and track record.

Obviously, it’s unlikely that Kainos will continue to deliver 20% annualised gains for the next three decades. But by building a portfolio of high-quality Kainos-like stocks, investors can certainly strive to achieve larger returns. Even if that means earning just an extra 1%, I’ve already demonstrated how a small boost can yield enormous wealth in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has positions in Kainos Group Plc. The Motley Fool UK has recommended Kainos Group Plc. 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »