Retirement saving: Should you invest in the FTSE 100 or FTSE 250?
The FTSE 100 and FTSE 250 are both relatively popular when it comes to saving for retirement. Many investors, in fact, focus on the two indices as one, with the vast majority of their portfolio being made up of FTSE 350 shares.
However, the FTSE 100 and FTSE 250 share very different characteristics which may mean that they are more suitable for individuals at different stages of their lives.
Retirement potential
For investors who have 10+ years until they plan to retire, the FTSE 250 may offer a superior risk/reward ratio than its larger index peer. In the last 20 years it has generated a total return per year of around 10%. This is significantly higher than the annualised total return of the FTSE 100 during the same period. It has recorded a return of around 5.4% per annum, which is somewhat disappointing on a real-terms basis, and when compared to its smaller peer.
Of course, the FTSE 250 is a more volatile index than its larger peer. Its falls during financial crises tend to be greater, since its constituents are smaller, more concentrated and generally have less financial strength than their large-cap peers. Therefore, while gains in the long run could be impressive, over a shorter timeframe they could lag those of the FTSE 100 in more challenging trading conditions. For investors with a long-term view, though, heightened volatility is not a major cause for concern - as long as the total returns remain high over an extended period.
Retirement income
When it comes to retirement, however, the FTSE 100 could offer a more appealing investment outlook. Its dividend yield currently stands at 3.8%, which will provide an investor with an income that is likely to remain ahead of inflation over the medium term. It also means that during retirement an investor can potentially live off the dividends received from the index, while not having to sell shares in order to provide an income.
In contrast, the FTSE 250 has a dividend yield of 2.7% at the present time. This may not provide an income that is above inflation over the medium term. It may also be insufficient to provide an income for an investor during retirement, which could mean they are forced to sell shares in order to generate capital to live off. As a result of this and the greater international focus of the FTSE 100, which derives 75% of its earnings from abroad versus 50% for the FTSE 250, the large-cap index may be better suited to retirees.
Investment potential
Of course, it is possible to generate even higher returns than the two indices through focusing on the best value shares within them. While at the present time the UK stock market is relatively high, there are still a number of stocks that could offer impressive retirement saving potential. As such, now could be a good time to research individual firms and invest in your picks for the long term.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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