Martin Lewis is bearish on premium bonds. I’m bullish on the FTSE 100!

Premium bonds are a relic of the past. It is time to invest this money in the FTSE 100 (INDEXFTSE:UKX) instead.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

My parents bought me my first premium bonds when I was at primary school. I kept the £100 of printed bonds tucked away in a brief case for the best part of 40 years, and I think I still have them to this day.

Premium bonds are part of the British savings culture. We all used to dream of winning the £1m in prize money, just as we had to be ‘in it to win it’ by playing the Lotto and Euromillions. After all, it’s only by taking part that you stand a chance of winning the jackpot. And the more you own, the higher your chances of making money.

Premium bonds were once a very clever idea

What’s more, with premium bonds, you’re not losing the cash that you invest, just the interest.

Now, in the days of yore when inflation was 5%-plus, and sometimes hit double-digits, that was a very clever idea. Although the interest represented a substantial amount of money there was a premium bond millionaire every month, plus a multitude of smaller prizes that almost all savers won at some point. It was a great way to save, with just that little fizz of excitement that you could take home the big prize.

Many people still have substantial amounts of premium bonds gathering dust in briefcases and safes hidden away in attics around the country. But have you taken a fresh look at how much money you’re actually making with these bonds?

Well, as Martin Lewis has spotted in his recent Telegraph article, the annual prize rate for premium bonds has now fallen to just 1.25%. To put it mildly, that’s not very much. The chances of you winning one of the £25 prizes are small, while only a handful of people in the whole of the UK will receive a £1m cheque.

But now you should choose shares

Compare it with what you can earn from some typical FTSE 100 shares, and you’ll see that you should be bearish on premium bonds, and bullish on the FTSE 100.

For example, investing stalwart Aviva pays out a dividend yield of 4.24%. Telecoms and broadcasting giant Vodafone currently yields 4.89%. And pharmaceutical firm GlaxoSmithKline produces an annual income of 5.51%. These are attractive returns, and far higher than you get from premium bonds.

What’s more, while the amount you earn from these bonds are down to the vicissitudes of the National Savings & Investments computer, the amount you collect from these dividends is clear and consistent. Plus, if you pick the shares you invest in carefully, then you’ll find that the share prices of your investments, as well the dividends, will gradually rise with time, making you even more money.

And as the long bear market of the past 17 years comes to an end, and a global bull market in shares gradually gets under way, I think that there’s no better time to invest in some well-chosen FTSE 100 companies.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »