Image source: Getty Images
On average, Stocks and Shares ISAs have returned 9.64% a year over the last decade. Compared to the 2.5% annual return generated by the best Cash ISAs, the difference is night and day.
In this light, the UK government’s move to encourage savers to consider investing instead looks like a sensible one. But what happens if the stock market crashes, like it has done in the past?
Stock market crashes
In a stock market crash, someone who invests £20,000 in a Stocks and Shares ISA might find that what they can withdraw is a lot less. And that’s something to consider carefully.
Share prices falling by 20% or more is a rare occurrence – it happens on average once every 7-10 years. But that’s no use to someone who needs to get their money back and finds they can’t.
Furthermore, the stock market’s almost certain to crash again in the future. And I don’t care what anyone says, I’m convinced that predicting exactly when it will happen is nearly impossible.
This doesn’t happen with Cash ISAs, so there’s a clear sense in which Stocks and Shares ISAs are riskier. But while it can’t be stopped or avoided, investors can do a lot to protect themselves.
Staying the course
The FTSE 100 and the S&P 500 are at all-time highs. This means that, through the ups and downs of the stock market, investors who are able to wait have always been fine in the end.
Historically, time has been a very good protection against losses. Even an investment in the FTSE 100 made just before Covid-19 would have generated similar returns to a Cash ISA since then.
The key to surviving a stock market crash is being able to wait for a recovery. And that means being sure to have enough cash on hand to avoid having to sell shares to raise more.
A Stocks and Shares ISA is risky for anyone who might have to sell during a downturn. But for those with a long-term view, I think the potential rewards mean it’s well worth considering.
A stock to consider
Being a shareholder in some of the world’s largest and most powerful companies can be fun as well as rewarding. FTSE 100 retailer Tesco‘s (LSE:TSCO) a good example.
Put simply, every time I shop in Tesco, I make money for the investors who own shares in the business. And the nature of the grocery industry means profits have been fairly stable over time.
The other side of the coin with supermarkets though, is that there isn’t much customer loyalty. People like me can change where they shop very easily and that’s a constant challenge for Tesco.
The company’s size however, gives it a big advantage over its rivals. More stores means better buying power and this is something it can use to retain customers with competitive prices.
Should UK savers be investors?
The risk with UK savers becoming investors is they could turn to stocks at an unfortunate time – right before a market crash. But they can give themselves a big advantage by being able to wait.
For those who can do this, stocks are worth considering. There are no guarantees, but I don’t think the huge difference in returns between Stocks and Shares ISAs and Cash ISAs is an accident.
This story originally appeared on Motley Fool
