The FTSE 250 isn’t as popular among investors as the FTSE 100. Despite technically being more diversified with a wider range of companies, the index is notoriously more volatile, which makes it a less attractive index to track for those with a lower risk tolerance.
The extent of this volatility was on display in 2022, with the index falling by almost 20%. By comparison, the FTSE 100 was actually up 1% over the same period. However, despite the tendency to drop by double digits during turbulent markets, the long-term performance of the UK’s growth index is still in the lead.
Since its inception in the early 1990s, the FTSE 250 has delivered an average total return of around 11%, outpacing its larger sibling by 3% a year. That may not seem like a huge difference. But when compounded over decades, it can be the deciding factor whether an investor reaches millionaire territory.
With that in mind, let’s take a look at how investing £250 a month in this growth index can provide a path to a potentially early and luxurious retirement.
How much do I need to retire?
According to the Office for National Statistics, the average pension pot at the age of 65 is £190,000. When supplemented with the State Pension it could be sufficient, depending on the individual. Starting from scratch, investing £250 a month in a low-cost index fund that mimics the FTSE 250’s 11% annualised return, a portfolio would hit this target within 20 years.
However, if the goal is to retire early, then a pension pot needs to be larger. Plus, for those seeking luxurious holidays and excursions, £190,000 probably isn’t going to cut it. So instead, what if I wanted £1,000,000?
Sticking with the same investing strategy for another 13 years would make this possible, thanks to compounding. But that’s obviously increasing the time an investor has to stay at work. So what other solutions are there?
Making a million faster
Instead of investing in an index fund, I could choose to buy specific individual FTSE 250 companies. Obviously, stock picking comes with its own set of headaches. Beyond having to dedicate significant time to research and portfolio management, the threat of volatility is also likely to be far higher.
However, the key advantage is that it opens the door to market-beating returns. And that might be critical to success, considering there’s no guarantee the FTSE 250 will continue to deliver 11% annualised returns over the next three decades.
Even if a custom portfolio only manages to yield an extra 2%, that’s enough to cut three years off the waiting time. And by bolstering the monthly contributions to £350, a further three years can be wiped out. In other words, it would theoretically take 27 years to retire a millionaire. That’s around 10 years earlier than the average worker with almost five times the wealth.
Of course, none of this is risk-free. Stock picking, when executed poorly, can backfire and even end up destroying wealth. And even index investing doesn’t guarantee hitting targets on time. All it takes is one badly timed crash or correction to send things sideways.
Nevertheless, investing still provides the opportunity to drastically improve personal financial prospects when taking a disciplined and long-term approach. At least, that’s what I think.
The post How drip-feeding £250 a month into the FTSE 250 could unlock an early retirement appeared first on The Motley Fool UK.
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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.
