It seems to me that lots of people think investing on the stock market can be risky. I agree there’s some risk because share prices can go down as well as up. And companies can cut as well as raise their dividends.
It could be worth embracing some risk
However, returns from shares, in general, have done well over the long term and have beaten returns from assets such as cash in savings accounts.
I think it’s worth aiming for the superior returns we can get from shares even if it means taking on a bit of risk. Because it might not be as safe as we think to put our money in a cash savings account.
It’s true that the balance in a cash account will never go down as long as we don’t take any money out. It’s also true that if the cash account pays interest the balance will go up over time. But there’s a big risk with cash accounts we must consider.
You might lose some monetary value in a cash account
Typically, Cash ISA savings accounts pay such low interest rates that, even when interest is added, the value of our money doesn’t keep up with inflation.
That means the spending power of our money will actually fall over time. That’s not good because it means when we finally withdraw the money, it’s just like having less money than we put in the cash account in the first place.
So I think there are risks involved in cash account savings and risks involved in investing in shares. But I’d rather take the risk with shares because there’s more chance of my money growing its spending power than there is in a cash account.
Instead of a Cash ISA, I would open a Stocks and Shares ISA for my plan to create £1m. ISAs – or Individual Savings Accounts to name them in full – are a way of putting money away so that it’s sheltered from tax. I think they’re a good idea.
Regular saving and hunting for dividend growers
I think it’s important to put my money into a Stocks and Shares ISA regularly (every month would be ideal). Then using the funds within, I’d buy shares in FTSE 100 companies, if they’re paying a decent dividend.
But I also think it’s important to look for FTSE 100 companies that are growing their dividends every year as well as companies that are just paying a big dividend.
The next part of my plan is to collect the dividend income in my account and buy even more shares. The plan can still work well if I’m short of time.
Instead of buying individual FTSE 100 shares, I’d put money each month into an FTSE 100 index tracker fund. And I would choose the ‘accumulation’ version because it would automatically reinvest the dividends back into the fund.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.