The FTSE 100 might get most of the attention from investors. But investing in a broad selection of FTSE 250 shares might be a better way to try and build long-term wealth.
Why? Well, over the long term, London’s second-most-prestigious index has delivered a much better return.
The FTSE 250’s composed of mid-sized firms that are generally in a growth phase. As a result, in recent decades, the earnings of companies in this index have grown faster than those of the more established companies in the FTSE 100, leading to better overall returns.
Since its inception in 1992, the index has delivered an average annual return of 11%. By comparison, the FTSE 100’s generated a return closer to 8% annually since it started in the mid-1980s.
Double my return
Okay, the gap between these numbers isn’t colossal. But the power of compounding — where one year’s gains build on the previous year’s — means that, over time, the difference in my wealth can become substantial.
Let me demonstrate. Based on that 11% average, a £10,000 lump sum investment in FTSE 250 stocks — supplemented with a £200 monthly investment — would make me £827,984 after 30 years. That’s assuming all dividends I receive are reinvested.
By comparison, an identical investment in FTSE 100 shares would turn into £407,429 over the same timeframe, based on that 8% average annual return.
Past performance is no guarantee of future gains. But the prospect of potentially making double (or even more) the return is the kind of opportunity that’s hard to ignore.
What next?
So which FTSE 250 shares would I buy? Investing in a range of stocks helps me reduce risk and make a smoother return from year to year.
A good plan could be to buy 10 different companies shares spanning various sectors and geographies. Choosing a mix of growth and income shares would also likely prove a good strategy.
Games Workshop (LSE:GAW) could be a great addition to this portfolio. It’s the world’s most popular manufacturer of tabletop gaming products, thanks to gold medal products like the Warhammer 40,000 system.
The popularity of this niche hobby has exploded in recent decades, driving profits through the roof. And the company has scope for further significant growth, especially in overseas territories where it’s expanding. It now has 548 stores spanning Europe, North America, Asia and Australasia.
A deal with Amazon to make TV and film content based on its IP could also take revenues to the next level. As well as introducing its miniatures and games to a brand new audience, the tie-up could also deliver significant royalties.
However, demand for its fantasy miniatures could drop during economic downturns. So to offset this I’d think about buying shares in Grainger (LSE:GRI), the UK’s largest listed residential landlord.
Property stocks like this are negatively impacted by interest rate rises. But, on balance, home providers like this can still be dependable investments over time. Spending on accommodation is one thing that tends to remain constant across the economic cycle.
Grainger’s expanding too, to give long-term earnings an extra boost. It has a development pipeline of around 5,000 homes to add to its existing portfolio of 11,153.
With a chronic housing shortage driving rents skywards, I think this is another great stock to consider.
This post was originally published on Motley Fool
