Forget a Cash ISA! I’d buy cheap UK shares in a Stocks & Shares ISA as the economy crashes

Thinking of investing your money in a Cash ISA as UK share markets shake? This could be one of the biggest mistakes you ever make, says Royston Wild.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To say the world economy faces significant challenges would be an understatement. A blend of extreme Covid-19-related turbulence, Brexit, and growing trade tensions has given investors plenty to chew over. Clearly, the outlook for many UK shares is less than rosy.

In this environment, you’d be better off parking their money in something like a Cash ISA, right? Unlike UK share investors, savers in cash products like these don’t have to worry about the broader economic landscape and, therefore, the prospect of fresh stock market crashes. The value of our money is unaffected whatever the weather.

Nope!

It’s not a sentiment which I share though. You might think your money is only in danger in the event of your bank or building society going bust. And even then, the first £85,000 of your savings are protected under the Financial Services Compensation Scheme.

The letters ISA (Individual Savings Account) on dice on stacks of gold coins on a white background.

But this couldn’t be further from the truth. This is because products like Cash ISAs don’t protect your money from the ravages of inflation. UK inflation rang in at 1.7% in 2019, far exceeding the interest rates of even the best-paying Cash ISAs. So, rather than make a real-world return on their savings, Cash ISA customers effectively saw the value of their money fall.

Inflation threats

Things are unlikely to get any better for Cash ISA savers either. Fresh rounds of Bank of England base rate cutting has pulled the potential returns on these products even lower. And even more central bank rate reductions could be in the offing as Britain responds to Brexit and Covid-19. It’s a situation that threatens to push inflation higher over the medium term as well.

I believe Cash ISAs are an awful way for individuals to invest their cash. I hold money in one of these low-paying products, but it’s not because of the return. I use them as a tax-efficient way to hold cash I might need at short notice. Instead, I buy UK shares in a Stocks and Shares ISA in order to build a handsome nest egg for retirement.

Making fortunes with UK shares

And let me show you why. The average annual return that a long-term investor in UK shares receives is between 8% and 10%. Clearly, over the long run, these investors still make returns that outstrip those on offer from other savings or investment methods. Indeed, compare that with the paltry sub-1% interest rates that Cash ISA investors receive.

Based on those rates of return, I can expect £200 invested each month in UK shares in my Stocks and Shares ISA to make me between £281,000 and £412,000 over 30 years. I would have made just £83,866 had I decided to park my money in a 1%-paying Cash ISA instead of buying UK shares.

So don’t stop buying stocks because of the uncertain economic environment. There are still plenty of cheap UK shares that could help you make an ISA fortune over the long run. And The Motley Fool can help you to dig these out.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild 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.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »