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Investing in FTSE 250 it can be the key for investors to improve their retirement prospects. The UK’s flagship growth index has been volatile over the years. But it also paved the way to much higher profits compared to its bigger sibling, the FTSE 100.
In fact, it was the difference between getting an average annual yield of 8% versus 11% from the start. And compounded over decades, that can add up to a very large portfolio. Let’s look at how investing £500 a month in the FTSE 250 can translate into a £1m portfolio for long-term, patient investors.
A journey to a million
A 3% difference in annual returns doesn’t sound like much. But in the world of snowmobiling, that’s a very big difference. To illustrate, here’s what the new portfolio would have looked like if that £500 had been invested in the FTSE 100 and FTSE 250 over the past 30 years.
| Years | FTSE 100 (8%) | FTSE 250 (11%) |
| 5 | £36,738 | £39,759 |
| 10 | £91,473 | £108,499 |
| 15 | £173,019 | £227,345 |
| 20 | £294,510 | £432,819 |
| 25 | £475,513 | £788,067 |
| 30 | £745,180 | £1,402,260 |
As shown, after 30 years of compounding, a 3% difference translates to almost a doubling of wealth. And for those looking to retire in style, a low-cost index fund seems to be the answer. Unfortunately, this figure relies on the optimistic assumption that the FTSE 250 will continue to deliver its historical returns. And sadly, there is no guarantee that will happen.
In fact, if we zoom in on the past ten years, the FTSE 250 has actually underperformed, delivering an annualized return of around 6%. It is the same story with the FTSE 100 as well. And at this rate, the journey to a £1m portfolio could take around 40 years.
Stock picking to save!
There is no denying the benefits that the index offers. It uses a multi-step process, allowing investors to build their long-term wealth passively. However, by choosing individual stocks instead of relying on funds, investors open the door to gains that outperform the markets and avoid fund management fees.
The Kainos Group (LSE:KNOS) is a good example of this. Since the digital technology specialist joined the public markets in 2015, shareholders have seen a total return of 432%. That equates to earning around 20% per year. And getting this rate of return over three decades would grow a monthly investment of £500 to over £11m!
In recent years, the price of Kainos has experienced some weakness. High inflation and interest rates have delayed projects for clients who need their digital services. And the restructuring of one of its biggest customers, the NHS, had a big impact.
However, with the macroeconomic situation improving gradually, 2025 could be a very profitable year for Kainos. And with a forward price-to-earnings ratio of 17.5, the shares seem fairly priced given their growth potential and track record.
Clearly, it is unlikely that Kainos will continue to deliver 20% annual returns for the next three decades. But by building a portfolio of top stocks like Kainos, investors can strive to achieve huge returns. Even if that means earning an extra 1%, I’ve already shown how small increases can yield huge wealth over time.
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