I love the FTSE 250 in bullish times. When the economy is strong and the stock market is doing well, investors are fired up over smaller-cap shares whose prices are climbing. And the FTSE 250 is home to many of those.
But we’re not in a bull market, so why would I be talking about it now? Well, the best time to buy FTSE 250 shares is not when everyone else is doing the same and share prices are high. No, I want to look for them when others have been scared away and they’re cheap.
We only have to look back at the greater stock market volatility in the FTSE 250 compared to the FTSE 100 through past ups and downs.
In the 10 years from December 2009 to December 2019, FTSE 100 shares rose by 39%. But FTSE 250 shares beat the pants off them with a 110% rise.
Pandemic reversal
Then the pandemic struck, and UK shares took a pasting. And the FTSE 250 saw the bigger fall. What was the best thing to do then? Was it invest in solid blue-chip FTSE 100 shares that would remain steadfast through thick and thin?
Well, from the lowest point after the Covid crash in March, to the end of August 2021, the FTSE 100 did gain 38%. But investors going for the higher-risk FTSE 250 instead of those big safety stocks would have enjoyed more than twice the profit. The FTSE 250 climbed 78%.
What now?
What’s this got to do with investing today? Well, since that 2021 peak, we’ve seen economic deterioration, Chinese economic weakness, and war in Ukraine, and markets have turned bearish again. And while the FTSE 100 has managed to remain fairly flat, the FTSE 250 has lost 20%.
I’ve never been one for trying to time the markets. I’m no good at it. And neither is anyone else I know. But I know two indexes with contrasting volatility when I see them. And if we want to invest in one of them, surely a better time is when it’s weaker compared to the other, isn’t it?
Which FTSE 250 shares would I buy? I haven’t done enough research, but I can tell you a couple of the ones I have on my radar.
Two cheap shares?
Direct Line looks good to me. The insurance sector can be cyclical, just like the FTSE 250. With Direct Line’s price-to-earnings (P/E) ratio forecast to plunge, I see growth prospects though recovery. There are big dividends too, and I’d look to lock in good long-term yields.
And then there’s Royal Mail Group, which has struggled. Its P/E would crash below six in the next couple of years, if forecasts turn out accurate. That’s got to be cheap, hasn’t it?
These have their own risks, which I haven’t tried to examine here — and I’d definitely dig deeper before I’d buy either. But they’re the kind of shares that I think might be even better buys when the FTSE 250 is out of favour.