Forget about the possibility of a second stock market crash. One of the biggest investment traps out there that threatens to ruin your chances of retiring in comfort is actually the humble Cash ISA, not the stock market.
You can be forgiven for thinking that cash accounts are the ultimate safe haven in times of financial market volatility like these. On one level this makes some sense. Unless the bank or building society in which your money is deposited goes bust, then your capital is totally secure. And even in that unlikely event, savers can rest easy in the knowledge that the first £85,000 in their Cash ISA is protected under the Financial Services Compensation Scheme.
Cash ISA concerns
When saving or investing though, you don’t need to just consider what your capital is worth today. You need to think about what the value of your savings will be in years to come. In this regard there are fewer mistakes you can make than by locking you money up in a Cash ISA.
One problem is that the value of your cash in real terms (once you factor-in the effect of inflation), will steadily decline over time. Secondly, even discounting the inflationary effect, interest rates of around 1% are hardly likely to generate the sort of returns that Cash ISA savers will be hoping for.
As Maike Curie, an investment director at Fidelity International, comments: “With interest rates at record lows, and the very real prospect of negative rates, leaving your hard-earned savings in a Cash ISA instead of the stock market may end up meaning far less growth over the long term.”
Can you get better returns elsewhere?
This is one of the reasons I prefer to invest for my retirement by using a Stocks and Shares ISA rather than the cash equivalent. I own a Cash ISA as well, but use this only to hold cash in an emergency, or to temporarily hold money before making certain larger purchases.
Why would I choose to do anything else? Like a Cash ISA, my stocks and shares product shields the returns on my capital from the grasp of the taxman. But using the money I put aside to buy equities, instead of it just laying dormant, can allow me to possibly make — over a long-term time horizon — an average annual return of up to 10%.
Of course, such returns aren’t guaranteed. That’s why some people prefer to park their dough in something like a Cash ISA. But studies show that returns in this sort of area are more than achievable. Some Stocks and Shares ISA investors manage to do even better by making a cool million or more. How many savers have you heard of who become millionaires by investing their money solely in a cash account?
The recent stock market crash provides a great opportunity for you and I to turbocharge returns on our hard-earned cash. There are plenty of shares on the FTSE 100 alone that are trading far too cheaply following the recent meltdown, firms with strong balance sheets and bright profits outlooks. And they certainly provide investors with a better way to try to get rich and retire early than low-paying Cash ISAs do.
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.