At the start of the year, Cash ISA rates looked a lot more attractive than currently. Interest rates stood at 0.75%, meaning that the future rates projection was above 1% in the short term. This meant that it was common to see Cash ISA’s offering rates comfortably above 1%. The coronavirus market crash in March put an end to that, with interest rates slashed to 0.1%. With Cash ISA rates starting to fall below 1% as well, it is difficult to know where’s the best home for your hard-earned money. For me, it’s investing and holding bargain FTSE 100 stocks!
ISAs and the route to a million
Before we get into my reasoning on why to go for bargain FTSE 100 stocks, it’s important to flag up two things. Firstly, I’m not keen on investing in a Cash ISA, but I do like ISAs in general. Being able to save money without paying capital gains tax on the profits is very appealing. I use a Stocks and Shares ISA instead, which allows me to invest in companies.
My ultimate aim in investing is to get to seven figures, and the ISA helps me towards this. For example, by investing the allowance of £20,000 over multiple years, the saving on tax adds up. After 20 years of investing and compounding with an average return of 10% per year, you would easily have a million pound portfolio. The saving on the capital gains tax alone would be over £100,000! So not only is getting over the £1 million mark achievable, but it’s massively helped when sheltered within an ISA.
Bargain FTSE 100 stocks
So now that we’ve got the administration sorted, let’s turn to the investment specifics. We’re looking for FTSE 100 stocks which could beat the returns of a Cash ISA. We could target some exciting, high-growth companies. However, I want to try and protect the downside risk as well. A Cash ISA won’t lose you money. So I’m looking for some bargain FTSE 100 stocks which I think are as safe as possible.
Historically, defensive stocks perform well during a downturn, making them safer to target than some other stocks. Defensive stocks include utility firms such as SSE and Severn Trent. Supermarkets, like J Sainsbury and Morrisons also qualify. To a certain extent, you can also include the likes of British American Tobacco. After all, firms that produce addictive products such as cigarettes tend to see demand stay firm at any point in the economic cycle.
Due to the market crash in March, even defensive stocks have seen share prices fall to levels that I’d call a bargain. For example, the SSE share price is 17% lower than the year-to-date highs. For a defensive stock with low volatility, that’s a large discount. So I’d be buying up stocks like this to look to make back that 17% over the next year or so.
For me, even with the principal protection of a Cash ISA, the upside is just not enough. With bargain FTSE 100 stocks, even though you could lose money, the upside is huge. Limiting downside risk by buying defensive stocks makes a great balance to set you up to get to a £1 million portfolio!
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Jonathan Smith and The Motley Fool UK have 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.