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Forget a Cash ISA! I’d rather aim to retire early by investing £100 like this

In some ways, investing small amounts of money is tougher than making large deposits. With any investment, you will want to make sure that your money will grow but is still relatively safe, and at the same time is well-diversified.

Many think that the best option for investing a smaller amount — like £100 a month — is to open up a Cash ISA.

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Often it is said that the investment cannot lose money, and over some time, will still grow.

They might say that building a well-diversified portfolio is not possible with only £100.

I think they are wrong and that £100 can get you a wonderful ISA return.

Red herring

I have heard time and again that a Cash ISA is a safe investment.

With the news of the FTSE 100 dropping by roughly 10% in a month due to fears over the coronavirus, it is easy to see why people are cautious about stocks and shares.

I would agree that a Cash ISA is probably best for investors saving for a short-term goal. Stock market fluctuations can mean you will record a paper loss, which will turn into an actual loss when your money is withdrawn.

But for investors saving for early retirement, or another long-term goal, I think they would be better off looking elsewhere.

This is because Cash ISA interest rates are so low, I fear they will not maintain pace with real-life inflation. £100 today will probably have a different value than £100 in 10 years. This is best evidenced just by looking at rates — the very best easy-access Cash ISAs will only pay about 1.3%, while inflation in January was at 1.8%. Over a decade, that discrepancy will mean your Cash ISA simply loses value.

The good news is that there could be another way to build a great portfolio with only £100 a month.

Stocks and Shares ISA

For a long term investor, I believe there is no other option as good as a Stocks and Shares ISA.

This type of ISA still gives you the same benefit of the Cash alternative, in that there are no tax implications for investments up to £20,000 a year. All your gains are tax-free.

Over a long period, shares have outgrown most other investments.

By purchasing stocks, you are buying a portion of the business. People often think the problem with a small amount like £100 is that you will only be able to acquire a small slice of one business.

However, there is another option called an index fund.

An index fund will track a particular stock market index. This means that by buying into the fund, you will own a portion of each of its components. By choosing a good index to track, this automatically means you will have a well-diversified portfolio.

For example, the FTSE 100 contains the UK’s top 100 listed companies. These corporations are involved in a variety of industries, like technology, financials, consumables, pharmaceuticals and oil.

Investors with £100 a month will be pleased to note that this amount is often enough to open an account.

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T Sligo has no position in any of the shares 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.