Seeking to generate a high return from investing in a Cash ISA may be an impossible task – even over the long run. While interest rates are likely to rise over the coming years towards historically ‘normal’ levels of 4-5%, that process may take a considerable amount of time. Economic uncertainty, for example, may mean the Bank of England decides to persist with a loose monetary policy.
Furthermore, interest rate rises are often prompted by higher levels of inflation. This could mean Cash ISAs ultimately produce negative real returns over the long run, which equates to a loss of spending power. As such, I’d seek to avoid a Cash ISA and would instead follow these three steps to build a nest egg for retirement.
Invest regularly
Investing regularly could be a worthwhile move for anyone who’s seeking to retire early. It instils a disciplined approach of investing through a variety of market conditions, which could allow you to capitalise on low valuations during periods of stock market distress.
Regular investing is also a cost-effective way to buy shares. A number of online sharedealing providers have regular investing services that cost from as little as £1.50. This could make it highly accessible to a wide range of investors. And with it being easy to set up and requiring minimal levels of effort in terms of administration once started, regular investing is an efficient means of gaining exposure to the stock market.
Always reinvest
While it’s tempting to spend the profits and dividends made on shares, doing so could negatively impact your retirement prospects. Not only does it reduce the size of your portfolio in the short term, it also means compounding will not be allowed to have its full impact on your investments.
As such, it’s a good idea to specify automatic reinvestment of dividends via your online sharedealing provider, and to decide from the very outset that profits are for retirement and not for spending before then. Sticking to this rule may not always be easy, but it’s likely to be beneficial in the long run.
Try to beat the market
While it’s always a good idea to diversify among a range of stocks in order to reduce risk, beating the returns offered by the stock market can be achieved by any investor. By focusing on high-quality stocks and buying when they trade at appealing valuations, you can generate higher returns than those offered by the FTSE 100 and FTSE 250 in order to improve your chances of retiring early.
Although it may not be possible to beat the market in every calendar year, doing so over the long run may be a more realistic goal than many investors believe. Even a modest outperformance can really add up when compounding is factored in, having the potential to provide a larger nest egg from which to generate a passive income in older age.
