Investing with a Stocks and Shares ISA has been one of the few tools available for British savers to build wealth over the last decade. After all, with interest rates at near zero, savings accounts barely seemed worthwhile. And even bonds failed to offer anything meaningful without venturing into low-quality assets.
Today, the situation’s rather different. Aggressive interest rate hikes to combat inflation have made savings accounts interesting again. Even after the recent cut, savers are still able to enjoy a near 4%-5% risk-free return at most banks.
So is there any point in investing in a Stocks and Shares ISA while Cash ISAs offer this boosted return? Here’s my take.
A safe way to build wealth?
Savings accounts have a massive advantage over the stock market when it comes to risk. Unless an institution suddenly goes belly up, there’s virtually no risk in building wealth with these financial instruments. The same is relatively true for government bonds through NS&I.
Historically, UK stocks have offered annual returns of around 8%. And so far this year, their performance has been a bit better than usual. That’s obviously an improvement on what many Cash ISAs are currently offering, yet building wealth in the stock market comes with significantly higher risk. And the last few years, in particular, have been quite volatile.
So which is the better choice?
What’s the investment objective?
Knowing which financial vehicle to use right now really depends on personal circumstances. Someone in retirement is likely better suited to stick to safer solutions. Whereas a younger investor with a long time horizon likely has the capacity to take on more risk.
In my case, I have the benefit of being in the latter category. Yet, instead of strictly sticking to one strategy, I’m using both. My emergency fund is in a high-interest savings account, while the bulk of my wealth is tied up in a Stocks and Shares ISA.
Finding stocks to buy in an ISA
There are a lot of different strategies investors can use to build wealth in a Stocks and Shares ISA. Dividend shares tend to offer a bit more stability and passive income versus growth stocks that often have the biggest return potential.
Personally, I like to steer in the direction of growth. And one of my largest positions right now is Arista Networks (NYSE:ANET). The company designs and manufactures ethernet switches used by data centres – a critical component that helps power the internet.
With the amount of data flowing around the world increasing exponentially, management has had little trouble finding demand. And subsequently, shares are up almost 500% since I invested in 2019. That’s an average of nearly 40% annualised return – massively ahead of even the best savings accounts right now.
Of course, this journey hasn’t exactly been smooth, with multiple double-digit drops along the way. Even today, the firm continues to face fierce competition from the likes of Cisco Systems, a much larger business with far deeper pockets.
Nevertheless, I remain cautiously optimistic. And with the potential to find more stocks with Arista-like returns, investing in the stock market remains my preferred way to build wealth despite the higher risk.
This post was originally published on Motley Fool
