The Bank of England base rate is currently 0.1%. When I factor-in inflation (around 0.7%), cash in my bank account is losing me value. Obviously, I need cash for various reasons. It’s great to have a rainy day fund, and cash on hand for other liabilities I wasn’t expecting. But for excess cash that I don’t really need, I personally think I should be looking at FTSE 100 investment ideas. The aim is to try and make my cash work harder for me, outperforming interest rates for my cash.
Ideas for income and protection
My first FTSE 100 investment idea is to target dividend shares. What kind of yield should I be expecting? Some FTSE 100 stocks have cut dividends due to the impact of the pandemic. Others have maintained the payout level, and due to a falling share price, offer a generous yield. These yields can be seen at 6% or higher. The FTSE 100 average is just above 3%.
The risk of this investment idea is that no dividend yield is guaranteed. It’s a constantly changing yield depending on the share price movement and the dividend per share. If companies struggle in 2021 and beyond, dividends may be cut again. This would decrease my income received and could be lower than I was expecting to make.
A second investment idea I like at the moment is buying FTSE 100 defensive stocks. I recently wrote a piece looking at utility companies and supermarkets. From digging deeper into the financial results from 2020, it’s clear that these sectors have continued to perform well despite the pandemic. This gives me confidence to buy into these stocks now with my excess cash. Even if we see a prolonged recession in the UK, these stocks could help me to beat the FTSE 100 average performance.
On the downside, defensive stocks will underperform the market if the UK economy really shines in the second half of this year. From that angle, I’d be better off buying high-growth stocks instead that perform better on positive sentiment. However, I’d try to counter any risk by splitting up my cash and investing in a mix of defensive and high-growth stocks
Staying invested with a diversified portfolio
This mix of FTSE 100 stocks is my third investment idea. I don’t specifically know which stock is going to be the top performer. So I’ll shake it up and own several to diversify myself. For example, I can bucket defensive stocks in one part, high-growth stocks in another, dividend stars in yet another. This mix should not only ‘blend’ my performance, but also reduce my risk to one company.
Finally, my last idea is to reduce my ‘tactical trading’ once I’ve bought my FTSE 100 stocks. With cash rates low, I don’t really want to be selling out and holding cash as I wait for a new opportunity. Buying and selling frequently can actually reduce my returns. A great statistic I saw was that if I’d missed the 10 best trading days over the past 30 years by sitting in cash, my return would be reduced by 2% a year.
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jonathansmith1 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.