Having a target of generating a £1m nest egg by retirement may be simpler than many investors realise. Certainly, doing so is likely to take many, many years. But it may not require an especially clever or innovative method to achieve that goal. In fact, investing in mid-cap shares could be a relatively straightforward means of accessing the rate of growth required to deliver a seven-figure portfolio by retirement.
Risk/reward
While many investors focus on the FTSE 100, over a long-term time period the FTSE 250 has historically offered superior returns. It’s made up of smaller companies than the FTSE 100, which can mean they are able to offer higher growth rates over an extended time period. This can be highly beneficial to an investor who’s looking for capital growth rather than an income.
For example, over the last decade, the FTSE 250 has recorded annualised returns of around 15%. In contrast, the FTSE 100’s total returns per year during that time are around 9.5%. Certainly, both indexes started from a low base at a challenging point during the financial crisis in 2009. But over a longer time period, the results are generally the same. The FTSE 250 has historically outperformed the FTSE 100.
Of course, for investors who are looking for income rather than capital growth, the FTSE 100’s dividend yield of 4.5% is more attractive than the 3% offered by the FTSE 250. Similarly, large-cap shares are generally more stable and less risky than mid-cap stocks. However, for investors with a long-term time period, the FTSE 250 could be more appealing.
Growth potential
With FTSE 250 companies generating the majority of their earnings from within the UK, the index lacks the international appeal of the FTSE 100. But this could present an opportunity for investors who are seeking to buy shares at a discount to their intrinsic value. In a number of industries, companies with a UK focus have seen their valuations come under significant pressure in the last couple of years as fears surrounding Brexit have increased. As a result, there could be value, as well as growth, investing opportunities on offer.
Clearly, Brexit could have a negative impact on the UK economy. It may also prove to be less harmful to the long-term outlook of the economy than is currently anticipated by many investors. As such, the valuations of a number of stocks may include margins of safety that make them attractive for an investor seeking to build a retirement nest egg over an extended time period.
Outlook
While the FTSE 250 may exhibit greater volatility than the FTSE 100, its return potential could mean that it’s worth experiencing greater uncertainty for some investors. Buying a range of mid-cap shares could therefore be a worthwhile strategy in order to generate a £1m portfolio in time for retirement.