Over the last few years, Cash ISAs have seemed to be an attractive option, with the best ones offering tax-free passive income of around 5% per annum.

They took investors’ cash from the stock exchange and this is no surprise. After all, Cash ISA interest is guaranteed… at least for the life of the contract.

Why risk losing money just to gain a few percent more in stocks and shares? In the compact term, why exactly? However, I think there are good reasons for long-term investing.

Please note that tax treatment depends on each client’s individual situation and may change in the future. The content of this article is for informational purposes only. It is not intended to be and does not constitute any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Risk versus reward

Cash ISA returns look good now, but when interest rates return to their long-term trend this will certainly change.

Meanwhile, FTSE100 managed to achieve a long-term average annual rate of return of approximately 7.5%, while FTSE250 will be at 11%. And they will certainly look even better when Cash ISAs return to a measly few percent.

Both of these stock indexes involve risk. We tend to view smaller FTSE 250 stocks as being higher risk than larger FTSE 100 stocks, so I’m not going to put every penny I have into them. But I’m elated to be able to buy and hold some in a diversified Stocks and Shares ISA.

And even if I don’t have the money to operate up the entire ISA allowance, I can still dream of investing that amount in FTSE 250 shares, right?

Long-term returns

Is there an example I could operate as an example of how dividends and price gains can result in a huge pile of cash?

I see abrdn (LSE: ABDN) has a forecast dividend yield of 9.6%, so achieving the long-term index average of 11% would not require much price growth. And the share price has dropped in five years, so is this a chance to get in cheaply?

It is an investment company and I would expect its earnings and share price to be more volatile than the market itself. When stocks rise, more people pour cash into companies like abrdn, and they can beat the market.

However, during periods of decline, shareholders can sell and lower the share price of investment management companies. It’s really not nice to see similar share prices falling while inflation and interest rates are rising.

Passive income

Either way, what could I make by putting £20,000 into ABRDN shares, just from dividends? Assuming the yield remains at 9.6%, the lump sum could rise to £125,000 over 20 years. And that could give me a passive income of £1,000 a month.

If I averaged 11% on the FTSE 250 I could take that to £1,400. Even a FTSE 100 index of 7.5% could add £530 to my income every month.

I would never put all my eggs in one basket. And I would only buy shares like abrdn as part of a diversified ISA. However, making such sums reinforces my belief that shares are a much better option in terms of long-term returns than Cash ISAs.