Buying FTSE 100 shares today after the recent market crash is a far riskier move in the short run than saving through a Cash ISA or Premium Bonds. The index may have shown signs of a rebound over recent weeks, but a highly uncertain economic outlook around the world means that its price level could come under further pressure over the coming months.
However, over the long run, the reward prospects of the FTSE 100 are likely to be significantly greater than those of Cash ISAs and Premium Bonds. Valuations across the index are low. So now could be the right time to buy a diverse range of large-cap shares for the long term.
Cash ISA risks vs the FTSE 100
Holding your capital in a Cash ISA will not lead to you losing money – provided you have less than £85,000 invested at a specific banking group. Your savings are protected by the government up to that level. This means the uncertainty surrounding coronavirus and the challenging outlook for the world economy will not cause you to experience a financial loss.
Likewise, Premium Bonds are backed by the government. As such, although you may not win any prizes, your capital is safe.
By contrast, the FTSE 100’s price level could easily revert to the downward trend displayed in March. Investors seem to be pricing-in a quick recovery for the world economy that may or may not materialise. Consumers could adopt a cautious stance on returning to their previous spending levels. Or lockdowns may be in place over an extended time period. So the prices of a wide range of companies could decline due to difficult operating conditions.
However, over the long run, the low valuations across the FTSE 100 could make it a far more rewarding investment than Cash ISAs and Premium Bonds. The track record of the index shows that it has experienced downturns and bear markets throughout its history. Yet it has always gone on to not only recover from them, but to post new record highs. These have enabled investors in FTSE 100 stocks to enjoy high returns.
In the coming years, the returns available on Cash ISAs and Premium Bonds could prove to be disappointing. Low interest rates look set to remain in place for some time. The Bank of England will support the economy’s recovery from what looks set to be a very likely recession so higher rates are unlikely. This may mean that the returns on Cash ISAs and Premium Bonds fail to match inflation. And that could lead to a loss of spending power over the long run.
Therefore, investors who have a long-term time horizon may be better off buying a selection of FTSE 100 shares today instead of holding Premium Bonds or a Cash ISA. Yes, the index may experience a challenging short-term period. But its returns may prove to be substantially higher than Cash ISAs and Premium Bonds over the long run.
Peter Stephens 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.