I wonder how many people in the UK have thousands tucked away in Cash ISA accounts? To guess the answer to that question, I’d say, probably millions of people. But cash savings interest rates are on the floor, so I’d rather invest in a Stocks and Shares ISA.
In my adult lifetime, I’ve never seen anything like this before. Indeed, the halcyon days of cash savings interest rates being close to 10% are but a dimming memory. Nowadays, I have a problem: the value of my money in cash savings accounts is losing its spending power because of the effects of general price inflation.
Shrinking debt and expanding assets
This problem threatens to escalate. Indeed, the government is taking on a lot of extra borrowings to fight the economic effects of the coronavirus crisis. And general price inflation tends to help the indebted. Why? Because it shrinks the real value of debt over time. So, there’s a strong incentive for the government to encourage inflation in the years ahead.
And one way to stoke up inflation is to keep interest rates low. So, I reckon cash savings accounts will be a dead loss for years to come. However, inflation tends to push up the value of assets such as property and shares. And there’s an opportunity for me in that situation.
I feel sure inflation could ramp up soon. So, I’ve been making some big-ticket purchases in connection with the ongoing improvement of my home. Indeed, spending cash now could buy me more value than spending the same money later, after prices have risen. And in terms of asset allocation, I already have a fair chunk of money tied up in my mortgage-free house.
How I’d target a 7% return
But I believe there’s an opportunity to get an annualised return close to 7% from the stock market. Indeed, a lot of published research points to historic returns close to the 7% figure, particularly in the US stock market. But investing for a long period of time is key to getting a return like that. And it’s also a good idea to iron out some of the volatility by spreading my investment broadly in the market.
Happily, I can do that easily and cheaply by investing in tracker funds. I’d go for putting regular monthly money into a Stocks and Shares ISA and spread it between tracker funds such as iShares Core S&P 500 UCITS ETF, Vanguard FTSE 250 UCITS ETF, and iShares Core FTSE 100 UCITS ETF. I’d make sure to plough back in all the dividend income along the way to compound and enhance my returns – many funds will do that automatically. Past performance suggests this could be a relatively low-risk way to get an annualised return close to 7% over the next 20 years or so.
I reckon that’s a good way to start investing. But with experience, I’d follow other investors before me and aim for even higher returns by investing in carefully selected shares of individual companies as well as funds.
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Kevin Godbold has no position in any share 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.
Motley Fool UK 2020