The FTSE 100’s recent market crash is likely to make some investors more risk-averse. As such, they may try to avoid losses by focusing their capital on other assets, such as cash and Premium Bonds.
However, with the annual Premium Bond prize fund rate sitting at just 1.4%, these assets may fail to produce returns that can match those of the FTSE 100 over the long run. As a result, it may be better for investors to own FTSE 100 dividend stocks instead.
Premium Bonds: Safe income
One of the main attractions of Premium Bonds is the fact they’re issued by National Savings and Investments (NS&I). As a government-backed institution, many savers believe the firm is a safer place to invest than stocks.
While this may be the case, low return rates are likely to mean Premium Bonds offer below-inflation results. Therefore, holding equities could be a better idea than relying on these government-backed securities to fund your financial future.
Over the past 120 years, UK equities have produced an average annual return of around 5% for investors, after inflation. Indeed, the FTSE 100 has a long history of producing inflation-beating returns for investors over the long run. The track record of Premium Bonds is less impressive.
Although the market also has a long history of experiencing bear markets, the good news is it also has a history of recovering from these downturns. Indeed, the market has always gone on to produce positive returns. Therefore, it seems highly likely the index will recover from its present challenges in the long term.
Clearly, the world is facing unprecedented economic risks and uncertainty right now. And it doesn’t look as if there’s any end in sight. From this perspective, Premium Bonds may look like a good bet. But investors who’ve been brave enough to buy high-quality stocks at low valuations have historically been well-rewarded over the long term.
What’s more, it’s highly likely many FTSE 100 companies could emerge from the current crisis in a stronger position.
The economic turbulence could allow them to consolidate their market positions, cut costs, and improve profit margins. That’s especially true of well-capitalised businesses. This could lead to impressive returns for long-term investors. Premium Bonds are unlikely to offer the same kind of profits.
Of course, some companies may not make it through. Businesses with weak balance sheets that experience a prolonged decline in sales may be unable to recover.
So, if you’re going to invest in FTSE 100 stocks, it’s vital to assess the quality of a business before buying it. You can also reduce risk by purchasing a diverse range of FTSE 100 stocks. Evidence shows that doing so could generate much higher returns than the current prize fund offering from Premium Bonds at present.
Overall, buying FTSE 100 shares while they’re cheap could be a better option for generating impressive total returns in the long run.
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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.