Forget a Cash ISA! I think that stocks give you a better chance of increasing your wealth!

Cash can seem safer than stocks, but that is an illusion!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What do you think is the safest way to hold money? If you ask the average person, chances are they will tell you that they prefer to hold their capital in cash. They will point to the relative stability of the value of the pound, and contrast it with the frequent swings seen in stock prices.

Yes, interest rates right now are at all-time lows. You would be lucky to get 2% on a promotional account with restrictions on maximum deposits. But at least you can be relatively certain that that £1,000 sitting in your savings account will be worth as much a year from now. 

Inflation

However, on a larger time frame, this security turns out to be an illusion. Since 1980, the UK has experienced total price inflation of 425%, meaning that what used to cost £1 in 1980 costs £4.25 today. Think about that. If you set aside £1,000 in the early 1980s, that sum would be worth less than £250 today. So the ‘safety’ of cash is entirely illusory.

Yes, cash savings do not experience the kind of volatility that can make stock investing seem daunting to novice investors. But would you rather put your savings into something that grows in value over time, or something that loses value over time? I think the answer is obvious.

Incidentally, the value of bonds erodes in a similar fashion, because the income streams they provide are fixed, and so over time they will lose their value as the value of the pound falls. 

This is why I think that people who are saving for their retirement would be better-served by building up a diversified portfolio of stocks, purchased at cheap valuations. The second part of that sentence is particularly important, because your wealth will only compound if you do not lose money. 

Evaluation

How do you do this? There are a number of metrics that you should be looking at when choosing stocks for your portfolio. The simplest one is the price-to-earnings (P/E) ratio. All other things being equal, you should target companies whose stocks are trading at lower P/E ratios than their peers, as this indicates that you are getting value per pound spent. 

Dividend yield is another important factor to consider. Not all stocks pay dividends – nor should they – but for those that do, you should pay close attention to them. While it may be tempting to jump at a stock with a double-digit yield, an excessively high yield is sometimes a sign that the company is in trouble (because investors are wary about buying it). It can also be a sign that the market expects a dividend cut in the near future. 

Investing isn’t the easiest thing in the world to do, but if you make sure to remember that the mathematics of stock investing is in your favour, you will be better-placed to succeed. Make sure to buy high-quality stocks at cheap prices and watch your retirement pot grow.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Neither Stepan nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »