The average Briton’s sitting on £21,392 worth of savings, according to CompareTheMarket.com. While past performance isn’t always a reliable guide to the future, history shows that an investment like this in UK shares could provide an excellent sum for retirement.
Here’s why investing in the London Stock Exchange could be worth serious consideration.
Cash benefits
Don’t get me wrong. I think holding cash in a savings account (like a tax-efficient Cash ISA) can be a great idea, depending on personal circumstances and goals.
This tactic can be used to manage risk. I know that £100 deposited in savings will still be there 10 years from now. The same thing can’t be guaranteed for £100 parked in a Stocks and Shares ISA, for instance. Stock markets go up and down and companies go bust.
What’s more, money put in a savings account can be easily withdrawn if suddenly needed for emergency cash. Selling shares requires more effort and cost. And as I say, I may have less money to draw down than I initially deposited.
Holding money in savings has also been more attractive in terms of pure returns recently. Savings rates have been pumped up following Bank of England (BoE) interest rate hikes. This has, for instance, meant that interest in Cash ISAs has picked up while subscriptions into Stocks and Shares ISAs has fallen.
Poor returns?
That said, parking money in a savings account isn’t without significant risk either.
The money deposited might be protected (up to £85,000 per person under the Financial Services Compensation Scheme). But investors who prioritise cash savings over investing in, say, UK shares may find they don’t have enough money to retire on.
Let’s say someone keeps that £21,392 earlier mentioned locked in a savings account for 30 years. We’ll assume that the interest rate here is 4.9%, the rate on my own Cash ISA. At the end they’d have £92,761 in their retirement pot.
The same amount invested in, say, a FTSE 250 tracker fund in a Stocks and Shares ISA could have made a vastly superior £315,116. That’s assuming a 20-year annualised average return of 9% on FTSE 250 shares remains the same. And of course, the £20k annual ISA limit means that £21,392 would need to be invested over two tax years
It’s important to note too, that savings account rates — mine included — are falling sharply as the BoE responds to falling inflation
A top fund
While riskier on paper, considering an investment in a fund like the iShares FTSE 250 ETF (LSE:MIDD) can help individuals greatly reduce risk to their money.
Investors spread their capital across a multitude of sectors including financials, real estate, industrials, and discretionary and essential consumer goods. This helps provide a smoother return across the economic cycle.
Furthermore, buying into a fund gives investors an opportunity to capitalise on many growth opportunities. Indeed, a higher weighting of growth shares means this fund has outperformed a comparable FTSE 100 ETF over the past two decades.
A large weighting towards financials (44.8% of total weighting) could see the fund outperform during downturns. But I’m confident it could still yield excellent returns for long-term investors. It’s worth serious research, in my book.
This post was originally published on Motley Fool
