Here’s why I’d invest £200 a month in cheap FTSE 250 shares, starting now

Since its launch in 1992, the FTSE 250 has made an average annual return of close to 11%.

It was a little while before it took off, mind, sticking close to the FTSE 100 in its early years. But since it found its own way, it hasn’t looked back.

But were looking at smaller-cap stocks than the FTSE 100, and not the big blue-chip firms that have been at the top for decades. So there’s more risk, right?

Well, the FTSE 250 shows more volatility than the FTSE 100, that’s for sure. And in every stock market slump, it’s tended to fall further.

Stock market crash

But then, look at the big 2020 stock market crash. Yes, the FTSE 250 suffered more, but not that much. By late March, the mid-cap index was down 38% compared to a 32% fall for the FTSE 100.

That doesn’t look like too much extra risk to me. And by the end of the year, the smaller stocks were well ahead of their bigger siblings. You know, ahead of the stocks that people say are safer in hard times.

The truth, at least as far as I see it, is that risk between the two indexes overlaps a lot. There are some in the FTSE 100 that could keep me awake at night, while the best FTSE 250 stocks would let me sleep soundly.

Stocks to buy now?

What cheap, downtrodden, stocks are there in the FTSE 250 that I might put £200 a month into?

Well, Persimmon is there, for one. And I already bought some of that. The home construction business has been hit by soaring mortgage rates. But against the short-term risk, I see a long-term cash cow. And I rate Persimmon as every bit as good as its FTSE 100 fellows.

Alliance Trust is a FTSE 250 stock, and it’s one of my favourite investment trusts. It invests globally, and aims for capital and dividend growth.

The dividend yield is modest at 2.4%, but the trust has raised it for 56 years in a row now. Where’s the extra smaller-cap risk there? I don’t see it.

There are some tasty growth stocks too, Like Games Workshop, up more than 250% in the past five years. Growth does mean more risk though.

£200 a month

So what might I get if I put £200 a month in FTSE 250 stocks like these? Well, at that historic return, I could end up with a pot close to £150,000 in 20 years. That’s not a big outlay each month, and it could make a very nice retirement boost.

In reality, I don’t expect such big returns in the future. No, I think the valuation is fairer now, taking in the extra potential and the risk.

So will I put £200 a month in FTSE 250 shares? It depends on what else I like the look of, and how much cash I have. But I might well do just that.

The post Here’s why I’d invest £200 a month in cheap FTSE 250 shares, starting now appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Persimmon Plc. The Motley Fool UK has recommended Games Workshop 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.