With the performance of a wide variety of assets having been disappointing in recent months, many investors may feel uncertain as to where they should invest their capital. On the one hand, the decline in the value of a variety of assets may cause them to adopt an increasingly risk-averse stance. This may lead them to utilise a cash ISA, since it offers a reduced risk of loss compared to many other assets.
At the same time, though, some investors may view the recovery prospects of assets such as Bitcoin as appealing. The virtual currency has fallen from almost $20,000 in late 2017 to trade at around $3,500 at the present time.
The reality, though, is that there may be a ‘halfway house’ between those two extremes. It could be logical to invest in this asset for the long term, with it offering high reward potential based on its track record of performance.
Growth opportunity
The asset in question is the FTSE 250. Although many investors focus on the FTSE 100 when discussing the UK economy, the reality is that the mid-cap index is a better guide to the health of the UK economy. That’s because the majority of its constituent’s income is generated within the UK, rather than internationally as is the case with the FTSE 100. As such, for investors seeking to invest in UK-focused stocks, it could be a more relevant index.
Of course, there’s a significant amount of uncertainty facing the UK economy at present. This may cause some investors to avoid buying UK-focused shares, since Brexit remains a potential threat on the near-term horizon.
The reality, though, is that there may be a number of lowly-priced stocks in the mid-cap index which are able to generate high returns in the long run. The FTSE 250, for example, has a dividend yield of around 3.3%, which is above its long-term average and indicates that it’s cheap. Since the index has been able to generate annualised total returns of almost 10% in the last two decades, its reward potential seems to be high.
Risk/reward
Clearly, there’s a risk that the FTSE 250 will fall in the coming months. After all, there aren’t just Brexit-related risks facing the UK economy, with the international growth story also somewhat opaque.
The track record of the index suggests it will be able to deliver a recovery – even if it experiences a further fall in the near term. It has always been able to deliver a successful turnaround following even the worst financial crises. For example, in the last 20 years, it has faced the dot com bubble and the financial crisis, going on to make higher highs in the years following both events.
Therefore, while it’s natural to contemplate investments such as Bitcoin and a cash ISA given the outlook for the UK and world economies, the FTSE 250 could prove to be a better buy from a risk/reward perspective.