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At first glance, anyone with a few pounds in the bank could consider themselves smart to put it into a savings account. After all, interest rates are high. Many banks offer 4% to 5% per year. Current forecasts call for that kind of range for at least the next decade as well. Savings accounts are also guaranteed, with basically no risk of losing money. Best of all, our country's generous ISAs provide full tax protection on any passive income generated in them.
What does that look like in practice? Well, let's take an investor with £2,000 to spare. Apply 4.5% annually to it and let it act. What do we end up with? On an investment timeline of, say, 30 years, we have £7,490, which is well above the original amount. This may seem attractive to many people.
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not so handsome
But let's back up for a second. Calculations like this cannot ignore inflation. However, they often do this because it is difficult to resolve when inflation increases from year to year. But even removing the Bank of England's 2% inflation target (well below where we've been lately, remember), the end result is an inflation-adjusted total of £4,195. That doesn't seem so pretty to me. At least not after 30 years.
That's why I invest in stock markets; for the highest rate of return. Yes, it is more risky. Yes, you could lose money. Along the way there will be accidents like the one in 2008. And I still have to consider inflation in everything I earn. But when the historical record of British medium-sized companies in the FTSE 250 Is it more than 10% annually since 1993? I'm willing to accept that risk. In those terms, also taking inflation into account, my £2,000 becomes £20,125. Those sorts of figures mean this is something I think any investor, with £2,000 or less, should consider.
One FTSE 250 share that I own, and which I expect to generate similar returns over the next few years, is JD Wetherspoons (LSE: JDW). The pub chain is as ubiquitous as it is cheap, and the reputation for low beer prices will support sales in the future, especially if cost of living issues intensify.
Get up and get up
The stock has taken a pretty big cut since Covid, down 63% from its peak. This is partly due to higher supply costs, higher energy costs and higher labor costs. The new budget will not have helped on those issues either. But I think Wetherspoons will be better positioned to handle these issues than its competitors, many of which are single premise or family-owned. If it falls much further then I will look to increase my position.
Long term, I see this as a company that will continue to perform. With an ISA full of high-quality stocks like this, I expect my net worth to go up and up. With a little luck along the way, I hope to withdraw a decent passive income in the end. In any case, I hope it's more than I would get from a savings account.
