Early retirement is something that’s almost unanimously wanted. The ability to hang up your boots for good, and spend more time doing exactly what you want to do is appealing. Some investors aim to speed up this process by savings funds in a Cash ISA. Others look to invest in high-growth FTSE 100 stocks instead. I believe that the latter option is much more likely to help generate enough profits for early retirement.
Years versus decades
Time is of the essence when looking to make money from your investments. Something that will make you 10% in a year is much more attractive than a return of 5% over five years. This is especially true when you’re starting to think about how early you could potentially retire. So how do FTSE 100 growth stocks compare to Cash ISAs?
Cash ISA rates haven’t changed much over the past few years. They track the Bank of England base rate fairly closely, and this has been in a range of 0.1%-0.75% for a decade. An average Cash ISA return would have given you around 1%-1.5% per year return.
Investing in growth stocks is harder to pin down an actual return. If you look at stocks such as Ocado, Halma and Flutter Entertainment, impressive returns can be seen. Ocado and Halma have generated over 100% returns over the past three years, with Flutter not much behind. Even if you invested in 10 of these companies and nine returned zero, the one that doubled in price would easily beat years’ worth of Cash ISA returns.
Capped versus uncapped returns
When looking to retire early, you’ll always want to err on the cautious side when budgeting how much you need. From this angle, you don’t want to have a limit on how much profit you can make from your investments. With a Cash ISA, you have exactly that. A fixed rate of interest for a year or longer. Yes you have protection on the downside, but you have no potential upside greater than the interest rate.
With FTSE 100 growth stocks, your upside is completely uncapped. This can be of huge benefit when you add up potential returns over the course of several years. I agree that this also means your downside is uncapped, and so investors need to be happy with the risk they’re taking on. Volatile moves lower can happen, as we’ve seen so far this year.
Yet on balance, as growth stocks are fast-moving, rapidly-expanding companies, in most cases I’d be happy to take on this risk. The chance for higher returns is clearly evident.
FTSE 100 growth stock ideas
My Foolish takeaway would be to look at some good examples of growth stocks currently available. The recent pandemic has provided some share price slumps that offer a cheaper buy-in price than a few months ago. On top of Ocado, Halma and Flutter, some more examples of growth companies can be read about here.
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Jonathan Smith does not own shares in any firm mentioned. The Motley Fool UK owns shares of Flutter Entertainment. The Motley Fool UK has recommended Halma. 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.