If you’re about to hit 60 and don’t have any retirement savings, then you may think it’s too late to build up a useful nest egg. I’m not so sure. I think that if you’ve got some disposable income today and are planning to work for a few more years, you still have a good chance of building decent savings. Today, I’ll explain how I’d do this.
Size matters
The legendary growth investor Jim Slater once said that elephants don’t gallop. He was making the point that it’s much easier for small companies to double in size than big companies.
History suggests Slater was right. Take a look at how the FTSE 250 index of mid-sized companies has performed against the FTSE 100 in recent years:
|
 |
FTSE 100 |
FTSE 250 |
|
5-year gain |
8% |
28% |
|
Gain since Nov 1996 |
87% |
345% |
If you’d put £10,000 into a FTSE 250 tracker fund five years ago, you’d have about £18,700 today, plus dividends. If you’d played safe with a FTSE 100 fund, you’d only have about £10,800, plus dividends.
The extra profit enjoyed by FTSE 250 investors has been achieved without any extra effort or difficult stock picking.
Admittedly, the 4.4% dividend yield from the FTSE 100 is higher than the 3.2% annual payout from the FTSE 250. But this isn’t enough to make up for the smaller gains delivered by the big-cap index. The FTSE 250 has smashed the FTSE 100 over the last five years — and over much longer time frames.
Is this a sure thing?
I can’t guarantee that the FTSE 250 will continue to outperform the FTSE 100. Between about 1996 and 2002, the FTSE 250 failed to beat the big-cap index. This may happen again.
Despite this, I do believe by investing in the kind of successful mid-sized companies found in the FTSE 250, you can increase your chances of finding big winners. At the same time, you aren’t exposed to the kind of speculative, unproven businesses found at the bottom end of the market.
If you’ve left it late to start retirement saving, I think putting your cash into a FTSE 250 tracker fund could be the best investment you’ll find for a five-to-10 year timeframe. To avoid any future tax bills, I would invest inside a Stocks and Shares ISA, if possible.
Reliable top performers?
To finish off, I’ve selected three stocks from the FTSE 250 I’d be happy to buy and hold forever. All three are proven performers and, together, I think they should provide a good mix of income and growth.
Britvic: The soft drinks firm owns brands including J2O, Robinsons and Fruit Shoot. It’s a reliable performer that generates high returns and has increased its dividend payout from 10p to 28p per share since 2006.
Computacenter: This IT infrastructure firm builds data centres, networks and much more for its clients. It’s profited from the long-term growth trend in online services. The shares have gained 50% in two years and has a great track record of paying out surplus cash to shareholders.
Jupiter Fund Management: Active fund managers are out of fashion at the moment, but Jupiter has a good track record, in my view, and is very profitable. A forecast dividend yield of 6.4% for 2019 is double the FTSE 250 average. I think Jupiter could be a good choice for income seekers.