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Why the FTSE 100 crash could make 2020 the best ISA year ever

CORRECTION: An earlier version of this article stated “The total number of ISAs subscribed that year dropped to 10,815. That’s the lowest number since ISAs were introduced, and way below the 15,246 taken out in 2010-11. The number of Stocks and Shares ISAs in 2017-18 fell to just 2,835, from a 2010-11 peak of 3,387.” The article has since been updated with the correct figures.

As the FTSE 100 crash hits our investments, I want to make two predictions for 2020. I think it could turn out to be the poorest year on record for ISA contributions… but the best one for those who contribute to a Stocks and Shares ISA.

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As far as contribution levels are concerned, we’ll have a while to wait to find out. The most recent available figures are for 2017-18. The total number of ISAs subscribed that year dropped to 10.8m. That’s the lowest number since ISAs were introduced, and way below the 15.m taken out in 2010-11. The number of Stocks and Shares ISAs in 2017-18 fell to just 2.8m, from a 2010-11 peak of 3.4m.

Before the FTSE 100 crash

I’m not really surprised, after years of political and economic uncertainty over Brexit. And before that started we were really only just getting out of the banking crisis. With most people going for Cash ISAs, low interest rates have also put potential investors off.

So the trend is on the side of my prediction. But the 2020 FTSE 100 crash will surely drive even more people away. Since Covid-19 hit these shores, the FTSE 100 has fallen by around 25%

It’s not surprising that many people shrink from buying shares when we’re in a FTSE 100 crash. The fear of seeing your money shrinking over the short term is understandable.

Stock market history

But rather than worry about your current year’s ISA, I say examine the history of the stock market. According to a Barclays study, UK shares have seriously outperformed other forms of investment for more than a century.

It’s a period that encompassed two world wars, the great depression of the 1930s, and an assortment of oil and financial crises. Oh, and the 1918 flu pandemic, with estimates suggesting between 17 million and 50 million people died.

What FTSE 100 crash?

Looking at share price charts over the past 120 years, two things are clear. The inexorable rise in share prices dwarfs the crashes. And people who invest their ISA cash during the dips do better than those who get in when markets are flying.

We can’t tell when the FTSE 100 crash will end, or where we’ll be at the end of the year. But let’s suppose it recovers its 2020 losses and ends the year flat overall. And then the Footsie provides average total returns (through price gains and dividends) of 6% per year thereafter.

Now, imagine two Stocks and Shares ISA investors. One invested at the low point of the FTSE 100 crash, at 4,899 points on 16 March. The other entered at the 52-week high of 7,727 on 30 September 2019. If each invested £1,000, how much would they have in 10 years? In 20 years?

Best ISA return

By my calculations, the investor putting down £1,000 at the peak would have around £1,700 after 10 years. And after 20 years they’d be up to about £3,000. Trebling your money in 20 years is really pretty good.

But the investor who went in at the bottom of the FTSE 100 crash would see their £1,000 ISA turn into nearly £2,700 after 10 years. And after 20 years they’d have almost £4,800.

The early years really do make the most difference. That brings me back to my prediction that this could be a great year for investors who don’t give up on their ISA contributions. In fact, I think 2020 could be the best year for ISA investors since at least the banking crash.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.