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.
The post Here’s how buying FTSE 250 shares could help me turn £20k into a million! appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
