If I had invested £20,000 in the FTSE 250 last year, this is what I would have today

I FTSE 250 it usually gets less attention than the flagship FTSE 100 Directory of leading companies.

But both contain several names in houses. The FTSE 250, for example, includes well-known companies such as Burberry (LSE: BRBY), Games Workshop, Ocado, again ITV.

Could index investing be a recipe for success?

Very recent performance

Looking back over the past 12 months, the FSTE 250 has increased in value by 23%. That means if I had put £20,000 into the index one year ago (for example, with an index tracker fund) my investment should be around £24,600 now, excluding any fees charged by the tracker fund.

Not only that, but I would have received benefits as well. This FTSE 250 company paid a dividend of 3.3%. That means around £660 a year in dividends on an investment of £20,000.

Now, remember that the dividend yield is a function of what one pays for the shares and the dividend per share. Benefits can go up – or down. But, given the very low performance of the FTSE 250 last year, if I had invested I would have got a higher yield than 3.3% last year.

Looking to the future

What’s next?

After all, past performance is not a guide to what will happen in the future.

Over the past five years, for example, the FTSE 250 has only increased by 4%. That includes the strong performance of the past 12 months, underscoring the index’s volatility.

Where things go from here depends on the broader economy, in my view.

Take Burberry for example. It was previously part of the FTSE 100, but the falling share price (down 60% in the last 12 months) has seen its market share decline, hence the move to the secondary index.

The reasons for the Burberry share price crash were the result of broader economic forces. A weak economy in key markets has led to a decline in sales of many luxury brands. As a cheaper brand than some of its high-end competitors, Burberry has seen sales fall sharply without benefiting from affluent customers who can’t afford the economic downturn.

However, I think its brand, large customer base, and extensive distribution network are all assets that should see the iconic raincoat maker improve business performance again sometime in the next few years.

However, when that will happen, I am not sure. The kind of gains we’ve seen in the FSTE 250 over the past year reflect an optimistic view of the economic prospects of its member companies, in my opinion.

If hope remains, the index can continue to rise. But I see a risk that economic weakness could derail the FTSE 250 over the next few years.

I’m not planning to buy an index fund and instead I’m looking for the best stocks in the index that may offer great value right now.