In the year to date, the FTSE 100 index has dropped by about 24% due to uncertainty surrounding the coronavirus outbreak. The exact amount of future damage the virus will cause to the global economy is unknown. This has led some potential investors to question whether it is now safe to buy stocks.
However, others believe it is now actually a great time to buy shares in quality companies at a discount.
So, what is the better bet for an investor? A Cash ISA or investing in stocks and shares?
Cash ISA
At the start of the coronavirus outbreak, the Bank of England lowered the base rate to 0.1%. This rate is used by high street banks to gauge where to set their interest rates.
This was seen as good news for borrowers, with the interest on their loans likely to be cut.
The opposite was true for savers. Savings accounts and Cash ISA interest rates were subsequently slashed. This meant that the interest they were earning was substantially less than before.
Fellow Fool Roland Head has pointed out that the average Cash ISA — with a typical balance of £5,114 — returns the investor just £12 a year.
If I was saving in a Cash ISA, I would be seriously considering alternatives, such as buying FTSE 100 stocks.
Are Cash ISAs safe?
Although they cannot make a paper loss, like stocks and shares at the moment, I fear that for a long-term investor, the returns of a Cash ISA will not match the rate of inflation.
With these returns, your money today will be worth substantially less in a few decades’ time. Long-term investors need to maximise returns, so what is the alternative?
Buying FTSE 100 stocks
Since its formation in 1984, the FTSE 100 has crashed multiple times. In each instance, the index has regained its losses.
Already, there might be signs that the market is recovering. Since March 23, the FTSE 100 is up by roughly 15%, as investors gain confidence that governments around the world are getting a grip on the crisis.
Although it is uncertain how the virus will affect businesses in the near future, people currently buying stocks have faith that the economy will eventually recover.
This is a trait of many successful investors. Warren Buffett bought his first shares in 1942. He later commented that “World War II didn’t look so good at the time”. He had faith that America would win the war and its economy would prosper.
This is a lesson that his mentor Benjamin Graham taught a young Warren Buffett. “To be an investor, you must be a believer in a better tomorrow,” is the thinking.
And with the FTSE 100 showing signs of a slight recovery, I think now is the perfect time for long-term investors to buy shares. I have faith in a better tomorrow.
