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.
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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.