The risk resistance of Stocks and Shares ISAs

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Why is it that more people don’t decide to put their money into stocks and shares ISAs? The fact of the matter is that most people tend to opt for cash ISAs, despite that fact that the interest rates they offer are woefully low.

Balancing interest rates against inflation

A lot of potential investors are afraid to invest their money in stocks and shares ISAs because they fear they will make a loss. What they usually forget about though, is inflation; especially now, post-Brexit. The figures just published for June show that inflation has fallen back from 2.9% in May, to 2.6%. It is believed to be only a temporary respite that comes about on the back of a drop in fuel prices.

However, 2.6% (a figure which is almost certainly bound to begin climbing again) is still significantly higher than the best interest rates you can expect on Cash ISAs. Easy-access Cash ISAs offer around 1% interest, while fixed-term ISAs offer around 1.95%. In real money terms, money languishing in Cash ISAs is losing value by 1.6%, or 0.65%; and as inflation goes back on the rise (the 2.9% is the highest rate for 4-years), the loss will get larger.

The truth about the volatility of stocks and shares

Is the stock and shares marketplace really volatile? The answer to this question is yes, but it is only volatile sometimes. Looked at in the short-term, the prices of stocks and shares fluctuate (sometimes wildly) on a daily basis. However, when you look at movements over a longer period, this volatility evens out. What this means for people who are prepared to invest their money over a longer period of time, is that the volatility decreases and good growth rates usually prevail.

If you take a look at what happened in the crash of 2008, although a lot of people lost a lot of sleep over their losses, by the end of 2009, share prices began recovering.  Now, some eight years later, the USA’s SP-500 is up 200% and the UK’s FTSE-100 has grown in a similar way.

There is always a risk in investing. Share prices fall as well as rise which is why IFAs usually recommend a minimum investment period of 5-years – to allow any volatility to smooth out.

The advantages of diversification

You can make investing in stocks and shares less risky through diversification. Stocks and shares cover all sorts of different industries and commodities. Some rise in value while others fall. By “hedging your best” and having an investment portfolio that covers a variety of industries and/or commodities, you can build in stability and growth potential. Then there are stable products such as ETFs (Exchange Traded Funds).

ETFs are not stocks and shares, but they are a product that is linked to the performance of an index or a bank or pool of investments, so they have in-built diversity. Like stocks and shares they are listed on the stock exchange. Unlike stocks and shares, whose prices are updated daily, ETF prices are updated every 10 minutes, which means you or your IFA can change your trading position almost immediately.

EFTs offer in-built diversity

ETFs are relatively new, but they are catching on fast. Not only do they offer in-built diversity, which can be tailored to meet individual requirements; they also have low investment levels and are cheaper to manage. Last but not least, because they are quoted on the stock exchange, you can have full transparency of your portfolio.

As far as a “stocks and shares” ISA goes (using the title loosely), If your portfolio consists of ETFs, many consider it to be a more secure platform.

Stocks and shares ISAs have performed above expectations

Stocks and shares ISAs have performed above expectations in recent years; in fact in the last 12 months, the average AER is 15.8% – way above Cash ISA AERs, or the interest from ordinary savings accounts. If like most people, you know little or nothing about investing, your best bet is to find an FCA approved independent financial advisor who can set something up for you based on your appetite for risk and your personal situation.

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