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Be brave: ditch the cash and invest your ISA

Cash ISAs are rubbish. To boost your savings, you need to invest.

Be brave: ditch the cash and invest your ISA

ISA season is upon us once more, the time when banks and building societies offer us great interest rates in return for our cash. Or not.

The thing is, we don’t really have an ‘ISA season’ anymore because no one has got any decent rates left to offer. In times gone by the standard savings institutions would compete for our cash at the end of the financial year, which ends on 5 April, in the hope we’d stick with them over the next year.

Although you can save more than ever into an ISA (which is short for ‘individual savings account’) - £20,000 a year from 6 April - and any interest you make on your money is tax-free, there isn’t a lot of interest to be had.

According to the average cash ISA interest rate is a measly 1.29%, down from a hardly mind-blowing 2.39% five years ago, which gives you some idea of how long savers have been deprived of interest for.

Most people with ISAs will be feeling this pain because most people who have an ISA have a cash ISA. Government figures show that in the 2015/16 tax year, 80% of the 12.5 million ISAs that have been opened are cash ISAs.

So why do we keep putting our money into cash ISAs when they offer us paltry rates?

Well the alternative to the cash ISA is investing in a stocks and shares ISA, but that means you have to invest your money and for lots of people that is a scary place to be. But it is worth it, especially when inflation (the cost of living) is rising and eating away at the value of your cash savings (in other words £100 will buy you less in future).

Take the example of £1,000 invested into an ISA in 1999 when they were launched, at the height of the dotcom bubble. Savers who had done this would also have been hit by the financial crisis in 2008, but they would still be sitting on more, at £1,663, than those who had placed the money in a cash ISA, whose pot would now be worth £1.204.

The figures prove that investing, as long as you’re prepared to do it over the longer term, is definitely worth it. It’s unlikely, unless you’re extremely lucky, that you’re going to make your fortune from investing in just one year and most experts agree that in order to profit from the stockmarket you need to invest for at least five years.

It’s likely that you’re not an ace stockpicker, I’m certainly not, but there are people who do it for a living and they’re called fund managers.

It’s a simple concept: you give these people your money, they pool it with other people’s money and they invest it, and they hopefully make you some money. This is known as ‘active’ fund management.

The companies they invest it in could be based on geography (for example, US, UK or emerging markets), size of company (small, mid or large companies), or sector (such as mining or healthcare).

If you have an idea of what you want to invest your money in - maybe you’re interested in Japan or socially responsible investing - then you can pick a fund manager.

Other managers have a remit based on achieving a certain level of income or not being too risky.

The only problem people have with fund managers is they can be expensive and because of this reason there is a growth in ‘passive’ funds. Passive funds don’t have a manager as such, and they simply mimic and track an index (which is why they’re also known as trackers).

For example, a passive fund that tracks the FTSE 100 (which is made up of the UK’s 100 biggest companies) would invest in all 100 companies proportionately to their size - more money in the largest companies compared to the 100th largest company.

If the share prices of the companies in the FTSE 100 go up, you make money, and if they go down you lose money.

Passive is cheaper than active when it comes to fund management, and I personally have a mix of the two. I also have some money in cash for emergencies.

Whatever investment path you choose, whether it’s passive, active, or individual company stocks, you have to be prepared to ride out any bumpy patches in performance and keep investing when the market is difficult.

It might be a rollercoaster ride but over the longer term the stockmarket will definitely do better than cash. So forget ISA season and relying on the banks’ rubbish interest rates and take control of your savings.

5 comments so far. Why not have your say?


Mar 31, 2017 at 14:03

I don't think Michelle makes a convincing case! To be "sitting on" £1663 after investing £1000 for over 17 years doesn't sound compelling, though it may be more than the return on a cash deposit. True, 1999 was a bad year to start because the FTSE was, with the benefit of hindsight, at a high level.

If she had been age 50 in 1999, she would now be 67, having waited 25% of her life to get this princely sum.

With hindsight, a person would have probably been better off just going out and spending the £1000.!

Often, the best advice you can give an older person with some spare money is: go out and spend it.

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Lee Whitehead

Mar 31, 2017 at 14:12

I'm starting to believe that this column has become the new "Diary of a Dumb Investor column"

Some good point have been made but not enough substance to really be helpful - and no mention of Investment Trusts either, which seems a no-brainer inclusion to me.

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Mar 31, 2017 at 18:55

Interesting how the article makes a big play on cash ISA's not keeping up with inflation. The hargreaves lansdown inflation calculator infers £1000 in April 1999 would be equivalent to £1603. ..which is almost the same as the value in the example shares ISA!

£1000 in Foreign & Colonial IT would be worth £3k today assuming dividends reinvested.

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Mar 31, 2017 at 20:03

£1000 in Scottish Mortgage in 1999 would be around £4500 now , and £1000 in North Atlantic Smaller Companies around £6250 - WITHOUT compounding any dividends! Just approx, from a quick look at the charts ; depends exactly when bought in 99. Huge possibilities with investment trusts.

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Mark Yu

Apr 01, 2017 at 08:21

A more appropriate comparison will be DCA say 1000 into a stock ISA or Cash ISA over a period, say over ten years or from 1999. Then the stcok ISA will stand a long way out.

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Fund managers lick wounds after Conviviality collapse

by Daniel Grote on Apr 23, 2018 at 14:05

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