The returns on Cash ISAs have been relatively low for many years. At the present time, for example, it is difficult to obtain an interest rate of more than 1.5% on a Cash ISA.
While this may not be seen as a major problem by savers in the short run, over the long term a Cash ISA could destroy your wealth. Inflation is currently above the interest rate on Cash ISAs, and could remain so over the coming years.
As such, it may be a better idea to buy a variety of stocks in order to maintain your spending power. Failing to do so may mean that your financial situation gradually become less favourable than it is today.
Negative real-terms returns
Although Cash ISAs currently provide a positive return that means the balance in your account will rise each year, their value is being gradually eroded by inflation. In other words, £1,000 held in a Cash ISA today will gradually be able to buy fewer goods and services due to the impact of inflation.
Furthermore, with interest rates unlikely to move significantly higher over the coming years, this situation may persist over the long run. A higher rate of inflation may be required in order to prompt the Bank of England to increase interest rates. This may mean that negative real returns remain a fact of life for savers.
Long-term potential
For anyone with a long-term view, holding shares rather than cash could be a sound move. Historically, the stock market has significantly outperformed inflation and has offered a positive real-terms return. This is likely to continue over the long run, since indexes such as the FTSE 100 and the FTSE 250 appear to offer favourable investment opportunities at the present time.
Clearly, anyone who needs instant access to their capital, or who is unable to take a long-term view of the stock market, may be better off sticking with cash. The track record of the stock market shows that while it has always recovered from disappointing periods, they can lead to significant paper losses in the short run.
Buying opportunities
One means of gaining exposure to the stock market in a simple and cost-effective fashion is through a tracker fund. This aims to mimic the performance of an index, such as the FTSE 100, at a cost of less than 0.3% per annum in many cases.
The advantages of a tracker fund include diversification and simplicity. However, it may be possible for an investor to outperform the index through purchasing individual shares. Since the FTSE 350 appears to offer a wide range of stocks that offer margins of safety at the present time, now could be a good time to build a portfolio of companies for the long run. They could boost your wealth, while a Cash ISA may do the opposite. As such, investing in shares could increase your chances of making a million.
