Should I invest in an equity ISA or a cash ISA?
ISAs are a highly effective savings tool.
Savers can choose between investing their annual £20,000 allowance in cash, stocks and shares, or a mixture of the two. In Britain we have shown ourselves to be a cautious bunch, with roughly 70% of all ISAs invested wholly in cash.*
But are most investors right to take the cash option for their savings? Is this inertia?
Let’s examine the pros and cons.
SHORT-TERM CASH
Almost everybody needs cash savings for an emergency fund and cash ISAs are good for holding money that you might need to spend in the foreseeable future.
LONG-TERM SHARES
For those with a longer time horizon and who are seeking better returns, stocks and shares ISAs are one option; history has shown that returns on the stock market far outstrip those achieved by cash over the medium to long term**.
Today, historically low interest rates make many savings accounts uncompetitive. Research conducted in May by Moneyfacts showed that only three of the 231 cash ISAs on the market paid rates that exceecded inflation (currently 2.1%), thereby maintaining the value of your money.***
According to research by Brewin Dolphin, over the past 10 years, the real (after inflation) return on cash has averaged -1.77% a year, reducing the value of a £10,000 investment to £8,364.
The annualised real return on the FTSE All Share index over the same period was 8.66%, turning a £10,000 investment into £22,936.****
Of course, stocks and shares ISAs are not for everybody. You need to be comfortable with the longer timeframe and the fact that your money can fluctuate in value. Stock market investing can be a bumpy ride and those with savings in the market over recent months may have seen fund portfolios fall by 10% or more, depending on where it has been invested. It can be a gut-churning experience if viewed day-to-day, and there will be people who are not comfortable with what can be a rocky ride.
** Source: E Dimson, PR Marsh and M Staunton, Global Investment Returns Database 2018 (distributed by Morningstar Inc).
***https://moneyfacts.co.uk/news/savings/savers-can-lock-away-cash-to-beat-inflation/
**** Brewin Dolphin Research March 28 2019 The value of investments can fall and you may get back less than you invested.
Your capital is at risk and you may get back less than you invested.
Past performance is not a guide to future performance.
No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.
Returns of UK Equities, Gilts, Cash and inflation
Source: E Dimson, PR Marsh and M Staunton, Global Investment Returns Database 2018 (distributed by Morningstar Inc). Indices are described in E Dimson, PR Marsh and M Staunton, Credit Suisse Global Investment Returns Yearbook 2018 (available from London Business School).
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
Andrew Wheeler
Brewin Dolphin
Andrew.wheeler@brewin.co.uk
01473 267200