My preferred way of investing for my retirement is to put money into a Stocks and Shares ISA, but it turns out I’m in a minority. New figures from HMRC show that Britons put four times as much money into Cash ISAs, despite today’s dismal returns.
I won’t be doing that. While I keep a stash of rainy-day cash for emergencies, I prefer to invest my long-term wealth in equities, as history suggests a Stocks and Shares ISA should generate far superior returns over time. The stock market may be more volatile in the short run, and prone to crash from time to time, but I think that’s a small price to pay for the long-term benefits.
In the financial year to 5 April 2020, around 13m Britons used the tax-free ISA umbrella, almost two million more than in the previous tax year. I suspect the trend has accelerated since, as people spent less in lockdown and learned the value of saving for a rainy day.
I’m choosing a Stocks and Shares ISA
However, three quarters chose to put money into Cash ISAs. That means three times as many people left their money to die a slow death in cash rather than attempting to generate a higher return from a Stocks and Shares ISA. With me, it’s the other way around. Three quarters of my savings go into the stock market, typically UK shares.
My reasoning is simple. They will grow faster that way. That’s especially true today, when the best easy access Cash ISA pays just 0.46%, while locking my money away for five years would give me just 1.21%. That looks a poor return to me, especially with the FTSE 100 forecast to yield 3.8% this year, according to AJ Bell, with any share price growth on top of that.
I’m hoping to generate a long-term annual return between 5% and 7% a year from a Stocks and Shares ISA, with dividends reinvested. This should help protect the value of my money against inflation. Cash won’t do that, especially if price growth picks up as many now expect.
I’m not buying the Cash ISA
Naturally, there are risks to my approach. As we saw in March last year, share prices can plummet in a matter of weeks. Every investor has to accept that today’s stock markets are affectively propped up by low interest rates and quantitative easing. Interest rates may recover one day, and then having large sums in a Cash ISA will make more sense.
Yet I’m still investing in a Stocks and Shares ISA and here’s why. Over the last 10 years, the average Cash ISA turned £10,000 into £9,770 in real terms, after inflation, while global stock markets turned it into £20,760 in real terms. Since 1899, Barclays found UK equities have beaten cash 91% of the time.
Investing in a Stocks and Shares ISA can sometimes feel like a rollercoaster ride, but the ups more than make up for the downs.
The post Here’s why I’m investing in a Stocks and Shares ISA instead of cash appeared first on The Motley Fool UK.
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 2021