Many people will be wondering what to do with their ISA allowance, as this year’s deadline looms ever closer. The stock market crash will deter some from investing in a Stocks and Shares ISA, and persuade them to play it safe with a Cash ISA instead.
I understand that way of thinking, but for many people, opening a Cash ISA could be a big mistake that will cost them dear in the long run. You might be surprised to hear that a Stocks and Shares ISA may be a better use of your allowance right now.
The big appeal of a Cash ISA during the current stock market crash is that your money is safe. While the FTSE 100 and other global indices have fallen by up to a third, any cash savings will not have fallen at all.
Cash ISA returns are poor
Everybody should have some cash, enough to cover six months of spending in emergencies like this one, held on instant access so you can get your hands on it quickly. But if you leave too much of your long-term savings in cash, you will regret it in the longer run.
History shows that stocks and shares deliver a superior return to cash over the long run. You may suffer the odd stock market crash like this one, but in the longer run, shares are a far better way to boost wealth for your retirement.
By investing in a Stocks and Shares ISA rather than leaving money to idle in a Cash ISA, you are getting exposure to the fortunes of the UK’s top companies, and will benefit both when their share prices rise, and when they pay out dividends.
Stocks and Shares ISA yields more
Blue-chip stocks typically yield around 4% a year on average, but in this crazy market, you can get as much as 15%. By contrast, the best easy access Cash ISA pays just 1.25%, a variable rate that is likely to fall in the near future, following the Bank of England’s move to cut base rates to 0.1%.
Even best buy Cash ISAs are set to pay less than the rate of inflation, which means the value of your money will actually be falling in real terms.
The stock market crash should actually tempt you to buy shares, rather than ignore them. Right now, they are about a third cheaper than before the Covid-19 crisis, which means you are picking them up at a relative bargain price.
You need to be brave to buy in a stock market crash like this one, and should only invest money you will not need for at least five to 10 years, and preferably longer, to give it time to grow in value.
In the longer run, current worries will pass, and share prices will recover. When that happens, you will be glad you chose a Stocks and Shares ISA over a Cash ISA.
The post Opening a Cash ISA? Here’s why I think you could be making a huge mistake appeared first on The Motley Fool UK.
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Harvey Jones 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.
Motley Fool UK 2020