Cash ISA rates have been increasing recently, in line with the Bank of England hikes. I can now pick up in excess of 2.5% on a one-year fixed term. Locking away money in a Cash ISA might be the right move for some people. However, I’m going to steer clear of it right now and put my spare funds in top growth stocks instead. Here’s why.
Making my cash work harder
Locking away my money for a year at a fixed rate of interest does give me certainty. However, as we currently stand, that certainty would force me to acknowledge defeat against high inflation and therefore the potential to earn a real (net of inflation) return on my money.
I can’t claim with certainty that investing in growth stocks will give me a real return, but it certainly gives me a good chance to try. For example, one of my favoured picks recently has been Investec, with a share price gain of 40% over the past year. SSE is another case in point, with a gain of almost 11% in the last year.
Of course, past performance is no guarantee of future returns. Buying now might not allow me to generate a real return for the coming year. But it does highlight that the potential to do this with such stocks is definitely there.
Reducing reinvestment risk
Another concern I have with a fixed-term deposit is my risk of what happens at the end of the year. At that point, rates could be higher or lower than I’m currently locking-in at. This gives me reinvestment risk.
With growth stocks, it’s easier for me to work with my long-term investing time frame. I can park my money there now, and hopefully see some capital appreciation over the next year. Yet I don’t have to then sell the stock and try to hunt for a new option. Over several years, I’d hope for my return to compound, in line with the realised growth prospects from the company.
For example, I can consider SSE as the utility company is investing large amounts in renewable energy forms. The revenue growth from this area should be realised in years to come as progress accelerates. By staying invested for the long run, I’d hope to be able to ride on the clouds for the whole journey.
Being sensible with growth stocks risk
A benefit of a Cash ISA is that my return is guaranteed. This isn’t the case with any stock that I decide to go for. The nature of this style of share means that I’m typically having to take a higher risk to account for the potential of a larger reward.
The product or service being pitched might be relatively unproven. Or it could be that growth is likely to come from international expansion, which is always fraught with dangers.
I do try and reduce this risk by doing my homework. I also veer towards FTSE 100 and FTSE 250 companies that have a large enough presence established already in the market.