Would investors be better off using a tax-efficient ISA to buy shares or save cash? While both have their uses, I plan to continue investing the majority of my extra funds to buy UK stocks.
Here’s why.
Better returns
According to the Bank of England, the average Cash ISA rate over the last year has stood at 2.71%. This means that £1,000 saved in one of these accounts 12 months ago would have grown to £1,027.
A series of interest rate hikes have boosted the returns cash savers can make over the past year. But even so, an investor like me could have made more money by parking a grand in a Stocks and Shares ISA instead.
According to Hargreaves Lansdown: “The same sum invested in a global tracker fund held in a Stocks & Shares ISA might be worth £1,193“.
A BIG difference
And if — as expected — interest rates fall to more normal levels in 2024, the gap between the returns on Cash and Stocks and Shares ISAs could grow even larger.
To get an idea of this potential disparity, it’s a good idea to look at the returns that savings and global shares have provided over the long term.
To this end, Hargreaves Lansdown says £1,000 parked in a Cash ISA a decade ago would have increased to £1,090.
By comparison, someone who had invested in a global tracker instead could now be sitting on £2,243.
Here’s what I’m doing
That’s not to say Cash ISAs don’t have their benefits. I know that £1,000 invested will still be there a year from now (plus some interest). My Stocks and Shares ISA balance, on the other hand, could crater if stock markets have a tough year.
For this reason, savings accounts can also play an important role in an investor’s risk management strategy. Cash ISAs can also be a great way to hold money you may need for a rainy day.
However, the superior returns I can expect to make with share investing means I put most of my extra cash each month in my Stocks and Shares ISA.
As Hargreaves Lansdown notes: “if you’re putting money aside for the long term, investments stand a better chance of beating inflation and delivering growth than cash“.
A FTSE share on my radar
I’m hoping to do this by building a balanced portfolio of stable growth shares alongside more cyclical ones. This can help me reduce risk and latch on to exciting growth opportunities.
One FTSE 100 share I’m hoping to buy to help me hit my target is Halma (LSE:HLMA). This rock-solid share has recorded record revenues and profits every year for two decades. On top of this, the safety products specialist has raised annual dividends by at least 5% for 44 consecutive years.
Halma makes a diverse range of safety, healthcare and environmental products it sells across the globe. These are markets that have significant structural growth opportunities, as the company’s proud record in recent decades proves.
Today, Halma shares trade on a forward price-to-earnings (P/E) ratio of 28 times. In theory, such a high figure could make the company vulnerable to a share price correction if newsflows worsen. But I think the FTSE firm’s excellent record and positive outlook merits this princely valuation.
