With there being a myriad of investment opportunities available at the present time, it is difficult to know where to invest your hard-earned cash. Of course, all investors want maximum returns for minimum risk. However, it can be difficult to obtain a worthwhile balance between risk and reward that provides growth potential with a limited amount of downside.
With that in mind, here’s why investments such as a Cash ISA, Bitcoin and Premium Bonds may not be a good idea right now. By contrast, investing in the stock market could prove to be a shrewd long-term move.
While a Cash ISA does not have a risk of capital loss, its return prospects are very limited. At the present time, for example, it is difficult to obtain an interest rate of over 1.5% on a Cash ISA. Since this is below the rate of inflation, it means that investors are seeing their spending power decline in real terms through having their capital in a Cash ISA.
As interest rate rises are forecast to be somewhat pedestrian over the medium term, with the Bank of England seemingly unlikely to risk the prospects for the economy during the Brexit process, the prospect of a significantly higher return from a Cash ISA may not be ahead for many years.
The average return on Premium Bonds is linked to the level of interest rates so they may offer a disappointing return in the long run. Certainly, there is a chance of a much higher return through the large prizes that are on offer. But with the odds of winning a million through Premium Bonds being 1 in over 37 billion, the chances of becoming a millionaire are relatively low.
Although it is possible to increase your chances of winning a prize by having more Premium Bonds, the average return remains at around 1.4% currently. As with a Cash ISA, this means that while there is no risk to your capital, the returns are likely to be below inflation.
While Bitcoin offers the potential for high returns, as demonstrated by its rise in the first half of 2019, it could also experience major declines. For example, in December 2017 it traded close to $20,000 before declining to around $2,500 within a year. As such, an investment in Bitcoin could easily double but it could halve just as easily.
With the virtual currency having limited scale and regulatory concerns, it may ultimately be unable to replace traditional currencies. Since it lacks fundamentals and its price is based solely on supply and demand among investors, it could be a very risky investment that is worth avoiding for many investors.
While Cash ISAs and Premium Bonds lack return potential, and Bitcoin’s risks are exceptionally high, the stock market could provide a balanced risk/reward opportunity. Certainly, there is a risk of capital loss when buying any stocks. But through owning a range of companies, it is possible to reduce overall risk.
With the FTSE 250 having delivered an annualised total return of over 9% in the last 20 years, the return potential of the stock market remains high. As such, it could be a better means of making a million than Premium Bonds, Cash ISAs and Bitcoin.
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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.