The recent decline in the FTSE 100 could cause some investors to determine that having a Cash ISA is a better idea than buying shares. After all, the lead index has fallen by as much as 35% since the start of the year. Meanwhile, Cash ISA balances offer substantially lower risk than equity investments.
However, with interest rates at their lowest ever level, the return prospects for Cash ISAs are extremely disappointing. As such, buying cheap FTSE 100 shares and holding them for the long run could be a better idea at the present time.
Cash ISA woes
Interest rates currently stand at just 0.1%. Therefore, the returns on Cash ISAs are highly likely to be outpaced by inflation over the coming months, and even years. The Bank of England may maintain a cautious stance on monetary policy to support a possible recovery from the economic impact of coronavirus. This could mean interest rates remain at low levels over a prolonged period.
The effect of low interest rates on your financial future could be highly disappointing. If your Cash ISA’s interest rate is below inflation, it will cause a loss of spending power. In other words, your cash will purchase fewer goods and services over time. This may make the task of building a retirement nest egg much more difficult.
FTSE 100 potential
In the short run, the FTSE 100 could experience further declines. Investor sentiment has been highly changeable of late. But as the economic impact of coronavirus becomes clear, investors may adopt a relatively cautious attitude towards the prospects for a wide range of businesses. This could mean that the FTSE 100 experiences a volatile future outlook.
However, the track record of the FTSE 100 shows that buying during such periods can be a highly profitable move. The index has been able to enjoy bull markets following every one of its previous bear markets. It could experience the same pattern in the coming years, and may be able to fully recover from its recent decline.
Furthermore, most investors are likely to have a long time horizon when it comes to buying shares. They may not need to access their portfolio or may not require a passive income from it for 10+ years. As such, they’re likely to have sufficient time for the stock market to recover from its recent lows to post higher highs.
Buying opportunities
Buying a diverse range of FTSE 100 stocks today could be a sound move. It may be riskier in the short run than having a Cash ISA. That’s because investor sentiment could weaken depending on news flow over the coming weeks. But, over the long run, the FTSE 100 may produce significantly higher returns than a Cash ISA which boosts your financial prospects.