Why should we take risks with a Stocks and Shares ISA, when Cash ISAs now pay good interest rates?
I think that’s a very good question. I mean, a quick search for top Cash ISA rates quickly finds some offering more than 5%. That’s for a fixed term, but we’re in it for the long term, right?
Still, even if I want easy access to my cash, I could bag around 5%. Unlike any stocks and shares returns, that’s guaranteed too.
Tempting
Yes, I can see why folks might be tempted to put their savings into a Cash ISA in these troubled times. And the number of people taking them up Cash continues to outstrip Stocks and Shares ISA take-ups.
According to the latest research by InvestEngine, anyone who maxed out their ISA allowance in a Cash ISA every year could have done quite well.
Had they done it since ISAs were introduced, they could have £274,650 in their accounts now.
But I’m having none of it, and I’ll tell you why.
Where the millionaires are
The thing is, there are around 4,000 ISA millionaires in the UK. And it doesn’t sound like they made their millions using Cash ISAs, does it?
These millionaires mostly went for the same approach of using their full allowance every year, but in a Stocks and Shares ISA. And they did that through all the same ups and downs as the Cash ISA investors.
That includes the banking crisis, the Brexit shock, Covid…
How much they have
Yes, a Cash ISA would have been safer, with its guaranteed interest. But taking the risk has just about quadrupled the returns enjoyed by millionaire Stocks and Shares ISA investors.
Well, actually, that’s going on the smallest sum needed to qualify for millionaire status. The most successful of them have way more than that.
In fact, the top 50 have built up an average pot of a big fat £8.5m.
Quarter of a million from a Cash ISA? Pah!
How might we join them?
So what do we do to join the UK’s ISA millionaires? Well, we have to understand that taking the extra risk doesn’t in any way guarantee better returns.
I don’t doubt that some folk have gone for more ambitious Stocks and Shares ISA strategies, and have crashed and burned.
So the key, for me, is to reduce risk via diversification.
Lower the risk
One way to do that is to use investment trusts, which spread the cash across a range of stocks within their stated strategy.
My favourite trusts are the ones that go for UK equity income, buying top-drawer FTSE 100 stocks.
And, as it happens, ISA millionaires put more of their cash into investment trusts than the average ISA punter. It’s up around 40%, compared to an average of 25%.
Max out, long term
Other than that, it’s all about using as much of our allowance as we can, and buying stocks we want to hold for at least a couple of decades.
Will this approach get me up among the ISA millionaires? I don’t know, but I reckon it gives me a better chance than a Cash ISA.
The post Forget a Cash ISA, here’s why I’d use a Stocks and shares ISA to aim for a million appeared first on The Motley Fool UK.
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More reading
Here’s how I use high-yield FTSE 100 shares to build a second income
Are ‘safe’ dividend stocks the best long-term investments? Not always
8.5% dividend yield! A cheap UK stock from the FTSE 100 I’d buy in a SIPP today
How I’d prepare for a stock market crash in October 2023
How much do I need to invest in income stocks to earn £15,000 a year?
Views expressed 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.
(The post is shared from syndication feed, it is not edited by Analyzing Market Team.)
