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In the UK, the number of adults invested in shares, trusts, and funds lags far behind those in the US and parts of Europe and Asia. The result is that millions of people are potentially missing a chance to retire in comfort.
According to the Financial Conduct Authority’s (FCA) latest Financial Lives survey, just 20% of Brits owned shares in 2024, while 17% hold a Stocks and Shares ISA. This equates to 10m and 9.3m people, respectively.
Compare this to the 62% of US adults (according to Gallup) that invest in stocks, for example.
Cash troubles
Most Britons prefer the security and the ease that cash savings accounts offer (71% of UK adults held some form of savings account last year, the FCA said). And since late 2022 they’ve gained popularity as Bank of England (BoE) interest rate hikes pumped up returns.
Savings accounts play a pivotal role in helping people manage their finances and save for retirement. I myself use one to hold cash I may need in a hurry, and to diversify my portfolio to reduce risk. However, investors who rely too heavily on these low-yielding products may be forfeiting opportunities to build life-changing wealth.
And with the BoE cutting rates again, returns on cash accounts could slide significantly in coming years.
1.21% vs 9.64%
Research from Moneyfacts illustrates the huge disparity in returns that share investing and cash saving typically produce.
The financial services provider says that the average annual return for Cash ISA savers is 1.21% for the last decade. That’s several miles below the corresponding 9.64% return Stocks and Shares ISA investors have enjoyed.
The mathematical principle of compounding — where individuals earn money on all their previous returns — means that this difference can have a substantial impact on individual’s wealth over the long term.
Someone who invested £300 a month in a Cash ISA would, after 30 years, have built a nest egg of £216,879 to retire on, if past performances are any guide. By comparison, someone who split this monthly amount 80/20 between a Stocks and Shares ISA and Cash ISA would have made a far higher £837,621.
A top ETF
Investors have to absorb higher risk to target better returns. But investment trusts and funds like the iShares FTSE 250 UCITS ETF (LSE:MIDD) can substantially reduce the danger they face.
These pooled investment vehicles often spread investors’ cash across a wide spectrum of assets. In the case of share investing, they can hold stocks spanning different sectors, sub-sectors, and countries, providing diversification that protects against volatility and specific downturns.
In the case of this exchange-traded fund (ETF), investors have access to the whole of the FTSE 250. Consequently, their exposure is spread over hundreds of companies as varied as property owner British Land, insurer Direct Line, housebuilder Bellway, and IT specialist Softcat.
And with an ongoing charge of 0.4%, investors can achieve diversification with this fund relatively cheaply.
Since its inception in 1992, the FTSE 250 has delivered an average annual return of around 9%. If this continues, our theoretical investor could have a great chance of hitting that £800k+ retirement nest egg if they included this iShares ETF in their portfolio.
Remember, though, that returns could disappoint during periods of stock market volatility.
