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.
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.