I’d drip feed £500 a month into the FTSE 250 to aim for a million
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.
| Years | FTSE 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.
The post I’d drip feed £500 a month into the FTSE 250 to aim for a million appeared first on The Motley Fool UK.
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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.
