The best Cash ISA on the market at the moment offers a dismal 1.31% per annum in interest. This suggests that after taking into account inflation, savers who pick this option could be getting a negative real rate of return on their money.
With this being the case, if you’re really serious about saving for the future, investing your money in a Stocks and Shares ISA could be the better option.
Beating cash
The great advantage a Stocks and Shares ISA has over a Cash ISA is the ability to invest anywhere.
You can invest your money in any stock around the world, as long as it is listed on a recognised exchange. That includes almost every developed market and a handful of emerging markets are available to investors.
What this means is that, unlike the Cash ISA, where you have no choice to accept the provider’s rate, you can move your money around the world to achieve the best returns.
Over the long term, this could give Stocks and Shares ISA investors a considerable advantage. For example, both the FTSE 250 and the S&P 500 have returned around 10% per annum, respectively, over the past three decades even after recent declines.
£1,000 invested at a rate of 10% for 30 years would grow to be worth £20k.
Returns will continue
There’s a good chance these returns will continue. It’s difficult to predict the direction of markets in the short term, but over the long run, as long as the global economy continues to expand, it’s highly likely the market will be higher in two decades than it is today.
That’s why it could be better to invest £20k in a Stocks and Shares ISA over a Cash ISA.
The returns speak for themselves too. £20,000 invested in a Cash ISA with an interest rate of 1.31% would be worth £22.8k after a decade.
However, the same amount invested in a Stocks and Shares ISA, growing at 10% per annum, would grow to be worth £54k after that decade. It would take 40 years of saving to make a million using this strategy.
You don’t have to use the FTSE 250 or S&P 500 to meet this returns target either.
Picking stocks
Index funds are an easy way to make the most of the market’s wealth-creating power. But, they’re not the only way.
A handful of FTSE 100 stocks have also produced double-digit annualised returns for shareholders over the past decade. Some companies’ track record of value creation stretches back even further.
That said, picking stocks can be time consuming. So it might be easier to target index funds for the long run.
With its collection of fast-growing UK-based mid-caps, the FTSE 250 could be the perfect index to track for this purpose. What’s more, some funds offer exposure to the index for less than 0.1% per annum in fees.
