Interest rates have been pretty appalling for years now. Due to various reasons, like Covid, the Ukraine War and now the Iran War, keeping a Cash ISA at anything near the inflation rate is hard work if at all possible.
Why is Inflation Important?
Inflation is, in simplified terms, the yearly rate at which everything gets more expensive. The Bank of England try to keep this at about 2.5% per year, but we have seen much higher.
If everything is more expensive, you need more money to buy everything.
Many companies have annual pay reviews and often you will get about 2.5%. This is in recognition that without these you would not be able to continue buying what you do now… or to put it another way, you would be getting paid exactly the same as everything gets more expensive. This has the same result as taking a pay cut, your pay is worth less than it was as you cannot buy the same amount as you were able to.
The same here applies to any money you hold. If you hold £1 and the price of a loaf of bread today is £1, you can buy it. If you held on to that pound for a year, the loaf of bread would cost about £1.03. A year later you cannot buy that loaf of bread anymore.
If you have £1,000 in savings, after a year you need that to be £1,025 to have the same buying value. This is the 2.5%.
So, you need a bank account that pays 2.5% per year for your money to keep its value. Let me repeat this, you earn nothing, it just keeps its original value.
Many Cash ISA’s are not even giving 2.5% and this is why inflation it important.
Stocks and Shares ISAs
There are 2 types of ISAs in the UK. Cash and Stocks and Shares (S&S). While both are ISAs (tax free individual savings) that is where the similarities end.
Cash ISAs are a standard bank account where you always get back exactly what you invest, with some interest.
S&S ISAs allow you to invest in… Stocks and Shares. Historically over a 7 year period, an S&S ISA following a global index fund has made about 8% per year on average, much higher than Cash ISA rates. Higher rewards do come with higher risks.
Martin Lewis has a great video from his show on YouTube where he explains how impactful S&S ISA’s can be, and the risks involved. Below is a link to the part where he answers a question from the audience and then talks about investing:
Martin Lewis Explains ISAs And Whether You Should Use Them | The Martin Lewis Money Show: Live
I recommend you view the whole video, but the Stocks and Shares ISA part explains enough and much better than I could.
How to open a Stocks and Shares ISA – probably not with your bank
Please don’t skip the video from Martin Lewis above.
NB: Nothing on this website should be considered financial advice.
Opening an S&S ISA with your bank will probably the easiest way to do this, but will most likely be the most expensive way. Banks offer Stocks and Shares ISAs, but many have high fees. If you do this, please make sure you look at the fees and exactly what you are investing in. Often they will take more fees and have worse performance than simply investing in Global Index ETF… which is really easy.
There are a number of platforms for investing that have very low fees, but the one I personally use and seems to get good reviews across the Web is Trading 212.
I have by far found this to be the most straightforward to use than anything else I have tried, however I strictly use this only for ISAs and none of there other investment products.
The process to sign up is incredibly easy. They have a website and app. I personally use the app. Here is a link to their ISA page:
https://www.trading212.com/isa
Global Index ETF
So, let’s assume you have an S&S ISA. You have deposited some cash. Now you need to pick something to invest in.
You could pick a single company to invest in. This might work out great if they do well, but if they don’t you could lose money. (you could lose money on any investment, if this is not clear, go back and watch the video from Martin Lewis).
The safer approach is to invest a little in many companies. Hopefully they all do well, but if some don’t, as long as you have more high performance companies you will still make money overall. So which ones to pick? How many? What countries? Industries? This is where a Global ETF comes in.
Investment companies like Vangaurd will offer various ETFs that track companies and assets like gold. A Global ETF tracks companies and as the name suggests covers all countries and industries.
The one I personally invest in is this one:
FTSE All-World UCITS ETF – Accumulation (VWRP)
Please make sure you follow the link and read about it. The fees to Vanguard for investing in the ETF are listed, as is the past performance and much more.
Investing in the VWRP
Assuming you have yourself an S&S ISA with a platform like Trading 212, you should be able to search for VWRP, which is the ‘Stock Ticker’ for the Vangaurd FTSE All-World, view all the information about it, and also invest in it by buying shares.
That’s really all there is to it. (I am not going to cover Trading 212 functionality here).
What Next?
Leave it well alone! Forget about it for a few years.
Once you have bought shares, you can watch the value in the app. As mentioned before, this can go down as well as up. The general recommendation is you only invest what you can put away for a number of years, around 7 seems to be the accepted wisdom, and this is a long enough time to weather any dips and hopefully get more highs.
Investing in an S&S ISA should NOT be viewed as a short term investment. Seriously, invest and then forget about it. This way you are less likely to panic. Having been invested for a while now, there can be big swings caused by global economic and political activity, but these swings can go both ways.
DYOR
As always, do your own research.
Hopefully this has given you enough information to get started and covered how I have approached this, but there is more to learn and understand. Here are some additional links that may help: