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At first glance, anyone with a few pounds in the bank might think they’re being clever and put it into a savings account. After all, interest rates are high. Many banks offer 4%-5% per annum. Current projections project this range for at least the next decade as well. Savings accounts are also covered, with virtually no risk of losing your money. Best of all, our country’s generous ISAs offer full tax protection on any passive income generated in them.
What does it look like in practice? Well, let’s take an investor who has £2,000 to spare. Apply 4.5% per year and let it run its course. What will we end up with? For an investment lasting, say, 30 years, we have £7,490, which is slightly more than the original amount. This may sound attractive to many people.
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Not so handsome
But let’s back up for a moment. Inflation cannot be ignored in such calculations. However, they often do this because it is challenging to account for inflation that varies from year to year. But even after taking into account the Bank of England’s 2% inflation target – well below, mind you, what we have been achieving recently – the end result is an inflation-adjusted total of £4,195. It doesn’t look very handsome to me. At least not after 30 years.
That’s why I invest in stock markets; for a higher rate of return. Yes, it’s riskier. Yes, I can lose money. There will be breakdowns along the way like in 2008. And I still have to take inflation into account in everything I do. But when the historical record of medium-sized British enterprises on FTSE250 has been over 10% per year since 1993? I am willing to accept this risk. On these terms, taking into account inflation, my £2,000 becomes £20,125. These kinds of numbers mean it’s something I think any investor with £2,000 or so should consider.
One FTSE 250 stock that I own and which I hope will deliver similar returns in the coming years is JD Wetherspoons (LSE: JDW). The pub chain is both ubiquitous and inexpensive, and its reputation for low beer prices will support sales in the future, especially if cost of living issues become more acute.
Arise and arise
Since Covid-19, the stock is down 63% from its high. This is partly due to higher supply costs, higher energy costs and higher labor costs. The up-to-date budget will not facilitate with this either. However, in my opinion, Wetherspoons will cope with these issues better than its competitors, many of which are single premises or family businesses. If it drops much further, I will consider increasing my position.
Longer term, I see this as a company that will continue to perform well. I hope that with an ISA filled with high quality shares this type of company will continue to grow. With any luck, I hope to be able to cash out a decent passive income at the end. In any case, I expect it will be more than what I get from my savings account.