NS&I Premium Bonds are one of the safest investments that can be bought today. NS&I is backed by the UK government. So, as long as the government remains solvent, the provider should be able to meet its obligations to investors.
However, due to the collapse in interest rates in 2020, I believe the appeal of Premium Bonds has vanished. As such, I’m buying UK shares instead of these government-backed products for the long run.
Premium Bonds lack profits
Premium Bonds don’t pay investors a regular rate of interest. Instead, owners are entered into a monthly draw where the total value of prizes is set at a certain percentage. From December, this will be 1%. What’s more, there are no guarantees investors will ever receive a prize. Indeed, from December, the odds of winning a prize for every £1 invested is 34,500:1.
These low rates of return have really put me off from owning these fixed-return products. Instead, I’ve been buying UK shares as I believe these investments have the potential to produce much higher returns over the long run.
Over the past 120 years, UK equities have produced an average annual return of around 8%. Usually, I’d think that such a high rate of return is unsustainable. However, 120 years is a long time, and the length of this dataset is enough to convince me that an 8% annual return is pretty sustainable in the long run.
Buying UK shares
There are plenty of options available for me to achieve this sort of return. Some of these promise a regular annual income, unlike Premium Bonds.
Buying a basket of UK shares is one option. I already own a range of stocks focused on sectors such as consumer goods and healthcare. Both of these are relatively defensive, which suggests the companies should continue to earn steady profits for decades to come, helping me hit my 8% return target.
Another option I could use is to buy a tracker fund. I mentioned above that UK shares have achieved an average annual rate of return of 8% over the last 120 years. The easiest way to replicate this sort of return during the past century would have been to own the whole market.
Today, there’s a way to do that. Buying low-cost tracker funds, such as an FTSE All-Share tracker fund, would provide me exposure to the largest companies on the UK market instantly.
I firmly believe this approach would achieve better returns than owning Premium Bonds over the same time frame. The one key difference is the fact that the value of the bonds will remain constant, meanwhile, stock prices can go up and down.
Nevertheless, I think this is a worthwhile trade-off. As the figures above show, over the long run, the UK stock market has yielded steady profits for investors. I’m quite happy to trade off a bit of volatility for the additional profits.
The post Forget NS&I Premium Bonds! I’m buying UK shares for an 8% return appeared first on The Motley Fool UK.
Rupert Hargreaves owns no 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