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Forget the Cash ISA! I’d buy the FTSE 250 to get rich and retire early

The performance of the FTSE 250 since the beginning of 2020 has been hugely disappointing. The index has experienced one of its fastest and most severe crashes of all time. Following this performance, it’s understandable that some investors might be eying up the relative safety of a Cash ISA instead.

However, despite the apparent safety the Cash ISA appears to offer in comparison to the FTSE 250, it has some significant drawbacks.

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Cash ISA drawbacks

At present, many investors are turning to defensive assets, such as gold and cash in response to the market’s sharp decline.

This flight to safety is understandable. Since the beginning of the year, the FTSE 250 has fallen by nearly 30%. No one wants to see their hard-earned money lose that much value in just a few months. Investors who were smart enough to move to cash at the beginning of the year have likely seen a positive return on their money.

Nonetheless, in the long run, investor sentiment towards riskier assets is likely to improve.

Indeed, in previous bear markets, confidence has always returned over the medium term. That could mean that the prospects for profits from the FTSE 250 are brighter over the long run than a Cash ISA.

Different returns

At the time of writing, the best flexible Cash ISA rate on the market is just 1.19%. That’s down from 1.35% at the beginning of the year.

With inflation standing at 1.5%, this rate implies your money will lose -0.31% of its purchasing power every year.

In other words, putting your money in a Cash ISA at the current rate will likely lead to losses over the long term.

On the other hand, while the FTSE 250 recovery may appear somewhat unlikely at the present time, over the long run, the index has produced an impressive performance.

Even after recent declines, the index has returned around 5% per annum since inception. That implies that the FTSE 250 could be a much better place to invest your money than a Cash ISA over the long run.

Therefore, now could be an excellent time to buy the FTSE 250. Further declines cannot be ruled out in the short run, but many FTSE 250 shares now appear to offer excellent value for money.

FTSE 250 bargains

Some FTSE 250 stocks have experienced falls of over 50% since the start of the year. In many cases, these companies have strong balance sheets and wide economic moats.

This suggests that when investor sentiment improves, these companies could produce significant returns for investors.

As it’s impossible to tell, at this stage, which companies will survive and prosper, and which will fail, owning a basket of stocks, such as a FTSE 250 tracker, could be the best way to play the recovery.

Considering the index’s past track record, it looks as if, in the long run, the FTSE 250 could offer impressive total returns relative to the Cash ISA.

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Rupert Hargreaves 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.