This Cash ISA pays 5.9%! So why did I just buy a FTSE All-Share tracker instead?

Savings rates may have increased dramatically but I still reckon the FTSE All-Share will make me far richer in the long run.

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The last 18 months have been brilliant for cash as interest rates soar, but not so good for the FTSE All-Share. So naturally, I’ve just bought a FTSE All-Share tracker.

NatWest and RBS currently offer a best buy two-year, fixed-rate Cash ISA paying 5.9% a year. If I had a lump sum that I needed for a set purchase in a couple of years, say, to upgrade my car or buy a property, this is probably where I’d put it. However, I’m saving with a much longer term view, and here cash doesn’t cut it.

My money goes into equities

Mostly I buy individual FTSE 100 stocks for dividends and growth. Recent purchases include Glencore, Lloyds Banking Group, Smurfit Kappa Group and Unilever. However, exactly one month ago today (7 July), I invested £5,000 into the Vanguard FTSE UK All Share Index Unit Trust.

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Having recently transferred three legacy pension schemes into a self-invested personal pension (SIPP), I had more money at my disposal than usual. I wanted to give myself ultimate diversification, across the entire FTSE All-Share. My Vanguard fund currently yields 3.33% a year with a rock bottom ongoing charges figure of just 0.06%.

The interest from the NatWest Cash ISA beats that, plus it has no annual charge at all. However, in contrast to the stock market, it offers no capital growth at all.

Over the last 12 months, my Vanguard tracker has delivered a total return of a modest 2.67%. That is less than NatWest’s 5.9% but this figures are not totally comparative. It was a poor year for shares and 12 months ago Cash ISAs were paying much less.

When it comes to investing, one year is neither here or there. If the FTSE All-Share had crashed 20% over the last 12 months, I’d still consider it a better option than cash. Equities are more volatile than cash in the short run, but much more rewarding over time. 

Time is on my side with a tracker

Over three years, the Vanguard tracker has delivered a total return of around 35%, while its five-year figure is more modest at around 15%. I should also point out that over most of this period, Cash ISAs were paying next to nothing. Interest rates have only picked up recently. I don’t think they’ll last either.

By the time my NatWest Cash ISA matures in the summer of 2025, savings rates are likely to be much lower than today. Yet the income I generate from my FTSE All-Share tracker will have increased, hopefully, as companies hike their dividends over time, and I reinvest them back into my fund to pick up more stock.

With luck, I will enjoy some capital growth too, when the UK economy and stock market recover from today’s troubles.

Investing is cyclical. Today, cash is close to a peak while shares are in the doldrums. I expect that to reverse. Over the long run, my tracker should easily beat cash. But I’m also hoping my individual stock picks will beat both of them!

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Harvey Jones has positions in Glencore, Lloyds Banking Group Plc, Smurfit Kappa Group Plc, and Unilever Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Unilever Plc. 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.

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