For the last 20 years, my Stocks and Shares ISA has been the undisputed home for my long-term savings.
Investing in FTSE 100 shares rather than parking money in cash always made sense to me, as history shows that equities generate a superior long-term return. It became a no-brainer after the financial crisis, when interest rates were slashed to nothing, while virtual money printing put a rocket under shares.
Suddenly, we’re in a different world as I can get 6% a year from a one-year fixed-rate bond, or 6.15% over two years.
Cash is finally back
By contrast, the FTSE 100 has grown by just 0.93% over the past 12 months. It currently yields 3.88%, giving a solid but less than spectacular total return of 4.81%. Investing in shares is riskier than cash, so is it time for a rethink?
First, it’s brilliant that cash is offering a decent return. Savers who don’t want to take risks with their money, especially the elderly, were abandoned by the Bank of England. It’s also good news for equity investors who want to park money in cash while waiting for the next buying opportunity. At least they get some return while they wait.
Yet I still don’t think cash is the right home for long-term savings. First, interest of 6% is still well below May’s recent inflation figure of 8.7%. Its value is still falling in real terms.
Second, I’d have to lock my money away for a year or two to get it. By contrast, I can cash in my shares at any time. However, there is a bigger risk. When my fixed-rate bonds expire, cash will pay a lot less.
While inflation is rampant today, it will start to retreat at some point, and possibly sooner than we think. The process is well underway in the US, with inflation falling to 4% in May.
I could get longer protection from a five-year fixed-rate bond, which pays up to 5.76%, but will miss out on the long-term rewards of investing in shares.
I’m sticking to shares
While investor sentiment is low today, history shows this is often the best time to invest. The FTSE 100 is packed with dirt cheap dividend stocks trading at less than 10 times earnings. By buying them when they’re cheap, I’ll benefit when markets recover, as they always do at some point.
I’ve just taken money out of my bank account and topped up my holding in Legal & General Group, which trades at just 5.76 times earnings and yields a stunning 8.76% a year. That’s more income than any bank account will pay me, plus there is plenty of scope for share price growth over the years and decades.
Plenty more FTSE 100 stocks have a similar profile. Neither dividends nor growth are guaranteed, but will reduce the risks investing in a spread of at least a dozen shares. Cash looks attractive today and it’s good to have the option. Yet the Stocks and Shares ISA remains my number one choice, and that’s not going to change.
