UK markets close in 2 hours 26 minutes

Want to make £1m? I’d start buying the FTSE 250 today

Rupert Hargreaves
Close-up Of A Piggybank With Eyeglasses And Calculator On Desk

Buying a low-cost FTSE 250 tracker fund could be the best investment decision you can make today.

The FTSE 250 is the second most prominent stock index in the UK. The FTSE 100 is made up of the 100 largest blue-chip companies listed in London. Meanwhile, the next 101 to 250 largest public businesses make up the FTSE 250.

UK-focus 

While around 70% of profits from FTSE 100 companies come from outside the UK, the FTSE 250 has a more domestic focus. Many of the companies that make up the index conduct all of their business in the UK.

These companies also tend to have faster growth rates. Many companies in the FTSE 100 are so big, the law of large numbers works against them. On the other hand, FTSE 250 businesses have a long runway for growth in front of them.

Moreover, as the FTSE 250 is a market-weighted index, the biggest and best-performing companies have a disproportionate impact on performance.

The best-performing companies rise to the top, while the worst performing sink to the bottom.

This gives the FTSE 250 similar qualities to a growth fund. The big difference between buying a growth fund and the FTSE 250 is cost.

Today investors can buy a low-cost FTSE 250 tracker fund for as little as 0.1% per annum in management fees. By comparison, most specialist growth funds will charge management fees of around 1% per annum.

Avoid high fees

The impact high fees can have on your wealth over the long run cannot be underestimated.

For example, an investment of £1,000 in a fund with an annual management fee of 0.1% would be worth £1,613 after 10 years, assuming an average annual rate of return of 5%. Over this period, an investor would pay just £15 in fees.

On the other hand, if the same fund charged 1% per annum, an investor would be left with a pot of just £1,480 after a decade, having paid £149 in fees.

Fund managers will argue that they need to charge higher fees to compensate for their time and effort spent trying to outperform the market. Unfortunately, research shows that most fund managers fail to meet this goal.

As such, buying a low-cost FTSE 250 tracker fund seems to be the best option.

FTSE 250 returns 

Up until the beginning of March, the index had produced a compound annual return for investors of 12% over the past three decades.

At this rate of return, an investor would need to deposit just £200 a month for 35 years to make £1m.

After recent declines, the index’s long term performance figures are less appealing, but the fall offers investors an opportunity to buy into the FTSE 250 at an attractive level.

Considering the index’s performance over the past three-and-a-half decades, buying now could be a good idea for investors with a long-term view.

While it is impossible to tell what the future holds for the market in the short term, over the next few decades, it is highly likely the index’s performance will return to its long-run average.

The post Want to make £1m? I’d start buying the FTSE 250 today appeared first on The Motley Fool UK.

More reading

Rupert Hargreaves owns no share 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.

Motley Fool UK 2020