Why I’m forgetting cash ISAs and putting regular money in this investment instead

Here’s how I’m aiming to balance risk against potential reward with the aim of beating the returns available from a Cash ISA.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Newspaper and direction sign with investment options

Image source: Getty Images

Every so often, I check the latest Cash ISA savings interest rates by clicking onto a comparison website, such as The Motley Fool‘s. And, on a recent visit, the best rate was just 1.11%.

The value of cash savings could decline

However, according to the Office for National Statistics (ONS), the rate of general price inflation in the UK was at 3.8% in October. And earning 1.11% while prices are rising at 3.8% means I’d lose some of my money’s spending power.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Therefore, my ‘investment’ in a Cash ISA would likely end up being a negative investment — in other words, instead of investing for profit, I’d likely be investing for a loss.

And the situation is unlikely to change. Historically, the interest rates for cash savings accounts have almost always lagged inflation. And that’s because central bankers tend to raise base rates as a reaction to inflation in the economy.

For me, the best way of taking advantage of the tax advantages is by choosing a Stocks and Shares ISA rather than a Cash ISA. Studies have shown that the historic total return from stocks and shares has outpaced cash savings. So I’m aiming to build and preserve wealth by investing in shares and share-backed investments within a Stocks and Shares ISA.

There are several simple strategies to pursue. For example, holding the shares of some investment trusts. They are run by managers who pick a selection of underlying stocks. Examples include Finsbury Growth & Income Trust and Smithson Investment Trust.

I’m also keen on holding a selection from the many low-cost, passive index tracker funds available. My choices cover small-, medium- and big-cap stocks in the UK, the US and emerging markets around the world.

Targeting enduring dividend shares

But on top of that broad-brush approach to long-term stock investing, I’d choose shares of individual companies. One popular strategy is to ignore the share price performance of a stock and focus on its dividend yield. A big part of the historical outperformance delivered by the asset class of equities (shares) has come from dividends.

And there are some attractive and growing yields available form UK stocks right now.

For example, I like the look of energy company National Grid‘s yield above 5%. And I’d consider food ingredients producer Tate & Lyle with its yield of over 4%. There’s also smoking products maker British American Tobacco with a yield above 8%, as well as many other dividend-paying stocks.

However, all stocks carry risks and a positive outcome isn’t certain. And that’s true even if I follow a simple and proven investment strategy. Indeed, past positive performance doesn’t guarantee good performance in the future.

But rather than having my cash losing value for certain in a Cash ISA, I’m balancing potential risk against potential reward with the investments in my Stocks and Shares ISA.

For example, I'd look closely at these stocks...

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies still trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Kevin Godbold owns shares of Finsbury Growth & Income Trust and Smithson Investment Trust PLC. The Motley Fool UK has recommended Finsbury Growth & Income Trust. 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.

More on Investing Articles

University graduate student diploma piggy bank
Investing Articles

Should I be concerned about the windfall tax for my BP shares?

What does the new UK windfall tax mean for the BP share price? Michelle Freeman digs into the details to…

Read more »

Buffett at the BRK AGM
Investing Articles

What Warren Buffett’s wisdom and investing in stocks will teach you about life

Investing is a journey of self-discovery. So what will stocks and the words of legendary investor Warren Buffett teach you…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

5 ‘no-brainer’ income stocks to buy today!

Amid soaring inflation, I'm looking at these income stocks, offering big yields, to grow my portfolio.

Read more »

Trader on video call from his home office
Investing Articles

How I’d buy the dip in quality UK stocks with £750

Jon Smith explains the concept of buying the dip, and talks through the UK stocks he's going to buy at…

Read more »

Woman looking at a jar of pennies
Investing Articles

5 UK penny shares to buy with £5,000 today

It's hard to remember a time when there were as many tempting penny shares around as now. Here are five…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

The Scottish Mortgage share price keeps falling. Should I buy?

The Scottish Mortgage share price has collapsed from its all-time high in little more than six months. Is it now…

Read more »

UK money in a Jar on a background
Investing Articles

Value investing isn’t dead! My top stocks to buy as inflation hits 9%

As value investing principles come back into fashion, Andrew Mackie looks at the current backdrop and shares what he's investing…

Read more »

Windmills for electric power production.
Investing Articles

Which FTSE 100 shares would I buy to offset higher fuel bills?

Rishi Sunak unveiled a windfall tax this week, hitting shares of energy firms, and especially oil & gas producers. But…

Read more »