For me, buying a spread of the best shares on the UK market is a better way of building long-term wealth than leaving money in a so-called high-interest savings account. It won’t be right for all the people, all the time. But I believe, in the longer run, equities remain the best way to build long-term wealth.
Even the very best shares will be riskier than cash. Always have been, always will be. However, I’ve ways of mitigating this risk, and even turning it to my advantage. The first is by investing in a balanced portfolio of at least a dozen stocks, so that if one or two hit difficulties, others should compensate by climbing.
The other way I reduce stock market risk is to invest for a very long time. History shows that while stock markets are volatile in the short term, in the longer run they deliver higher returns than pretty much every rival investment.
Here’s what I do
Leaving money in cash is riskier than many people realise. The danger is that inflation erodes its value in real terms, unless savers consistently hop from one best buy high-interest savings account to another. That involves a lot of effort. I aim to keep the effort levels down by investing in a portfolio of the best shares I can find, and leaving them to get on with it.
When I buy shares, I’m looking to hold them for the long term. By that, I mean a minimum five years, and preferably 10 or 20 years. That gives time for my stock picks to grow, and my dividends to compound.
There’s another reason why I’d rather buy today’s best shares than leave money in a high-interest savings account. The truth is, you cannot get high interest today, anywhere. It doesn’t exist!
The average easy access account now pays just 0.18%, according to Moneyfacts. This is down two thirds since last year when it paid 0.59% (also not good). Even if you lock your money away, the average longer term fixed-rate bond pays a meagre 0.7%. That’s a real problem given that the consumer price index jumped to 0.8% in December.
I’m buying the best shares I can find
Right now, you can get around 1% with a fixed-rate bond, but that involves locking your money away for five years. That may work for older savers keen to avoid risk, or those saving for a shorter-term goal such as a property deposit. But it’ll do little to build long-term retirement wealth.
The best shares can do that, as many offer income as well as growth. The FTSE 100Â is still expected to yield around 3.5% this year, despite last year’s dividend cuts.
I use my Stocks and Shares ISA allowance for tax-free returns. I also take advantage of any stock market dips to pick up the best shares at reduced valuations. Then I reinvested my dividends for growth, and let them get on with it.