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The costs of not investing in a Stocks and Shares ISA can be truly astronomical. Millions of people prefer the security of a guaranteed return with savings accounts. It’s a strategy that can sabotage a shot at a comfortable retirement.
According to Moneyfacts, the average annual return of a Cash ISA since 2010 is 1.79%. Compared to the 6.79% that the investing ISA has delivered, the gap in potential wealth over time is staggering.
The tragedy to me is that the modern investor has many options to generate wealth without taking excessive risk. Want to see how I’m building a serious nest egg for retirement?
Double trouble
My plan doesn’t involve sticking all of my money into the stock market. Like many Britons, I love the Cash ISA, with its enormous tax benefits and reliable return.
But the majority of my extra cash each month is put in shares, trusts and funds. That 5% difference each year between cash savings and the Stocks and Shares ISA can add up to hundreds of thousands of pounds over a lifetime.
It’s not just the risk that I’m losing out on better returns elsewhere that drives me either. Inflation means my money may be losing value in real terms if locked in a low-yielding product.
This has been the case since 2010 when inflation has averaged 2.92%, above the 1.79% Cash ISA return. In other words, cash has been a losing asset class.
A £500k+ nest egg
Let’s check how these returns could shape someone’s savings stash for retirement. With £500 a month put into a Cash ISA, I’d make £238,050 after 30 years, if the average annual return since 2010 stays the same. Would that likely be enough money for me to live comfortably in retirement? I have my doubts.
Conversely, if I put that £500 a month into a Stocks and Shares ISA instead, I’d have £585,303 for retirement. That’s a staggering difference of almost £350,000.
I’m not suggesting that investors put all their money in the stock market. That’s far too risky, even for someone who loves share investing like myself. An 80-20 split between the investing and savings account is one popular strategy I’m a fan of. With this method, I could have an impressive £515,852 to retire on if all goes well.
Investing wisely
Not everyone reading this will still be comfortable with the idea of investing. So let me talk about the benefit of considering exchange-traded funds (ETFs) like the Xtrackers World Momentum ETF (LSE:XDEM).
I love these products because they balance risk and reward extremely effectively. This particular one (which I own) holds shares in 350 global companies, ranging from US tech shares (Nvidia) and UK banks (HSBC), to Japanese games companies (Nintendo) and Canadian miners (Kinross Gold).
This diversified portfolio provides a smooth return over time, and protects investors from weakness in specific sectors and regions. Delivering an average yearly return of 14.2% since late 2015, it’s certainly been an excellent investment for me.
Like any shares-based fund, it can go up and down according to stock market conditions. But over the long term, equities markets have a knack of moving substantially higher. Those who invest in an ISA instead of saving can build significant wealth in the process.
This story originally appeared on Motley Fool
