How safe is cash?
Well, if you were around in the 1970s, you’ll know that cash can be a disaster.
Between 1970 and 1980, the pound fell to a quarter of its value.
Think about your shopping and utility bills.
Can you imagine paying four times more every month?
This has happened before. It can happen again.
And even if it doesn’t, you know that inflation is always there. You see it almost everywhere you spend.
[top_pitch]
This is the big risk of holding too much cash in an ISA
Nowadays, the interest you get from a savings account does not keep up with inflation.
Over time, you are almost certain to lose.
Most people see inflation as ‘the cost of goods rising.’
This isn’t quite right.
It’s much more accurate to say ‘the value of your pounds is falling.’
Inflation happens when central banks “inflate” the currency in circulation.
As they print more money, and make it available at ever-lower rates, you have more pounds bidding up the prices of everything. Not just consumer goods, but assets like stocks, property and more.
It’s why you should at least consider a Stocks & Shares ISA.
Unlike a normal Cash ISA, you can fill this with a wider range of assets.
For example, when you own a stock, you own part of a real business. One which collects revenue and perhaps even pays a dividend.
If it’s a strong business, its value should rise with inflation.
Since its customers are also paying more, your earnings and dividends should rise too.
Just holding high-quality shares can give you real protection from inflation.
And if you hold them in a Stocks & Shares ISA, you’re protected from taxation too.
[middle_pitch]
You can also diversify your holdings
One easy option is to buy an exchange-traded fund (ETF) of, say, the entire FTSE-100.
Now you have exposure to Britain’s top 100 companies, all in one simple fund.
No need to follow the markets religiously.
You can buy ETFs in your brokerage just like any stock. Add more savings whenever you like.
Another benefit of ETFs: you can buy funds that focus on different countries. Or specific industries.
This lets you diversify your savings outside the UK.
India is just one interesting place to think about.
India has a rising middle class and a younger average population. That is a lot of people who’ll be earning and spending money.
You can position yourself for what’s ahead.
You don’t have to research every company in India.
Simply buy an India ETF and Bob’s-your-uncle. You’re done.
Of course, emerging markets like India are more volatile. However, the potential is explosive. And with an ETF, you spread the risk across dozens of companies.
What are the risks of ETFs?
Although ETFs free you from in-depth research, you shouldn’t buy them blind.
At the very least, have a peek at the fund’s top 10 holdings. Make sure they really are in the sectors promised.
Most funds will also have easy-read pie charts to show you how the money is positioned.
As you look at these, check they’re holding real assets. Some “synthetic ETFs” don’t actually hold shares on your behalf. Instead, they trade derivatives to try and track a benchmark index.
Unless you know really what you’re doing, these should be avoided.
A very small chunk of derivatives (maybe 2%) is fine. But it should not be the bulk of your fund.
