The big fight: why investing is the knock-out champion versus cash

It is not just how much you invest but how early you invest which can make the difference to the size of your savings pot.

Failing to put money in a Stocks & Shares ISA could prove to be a costly mistake in time. You could potentially miss out on hundreds or thousands of pounds of wealth creation.

You have until 5 April 2017 to use this year’s ISA allowance of £15,240 with any capital gains and income protected from the taxman. Every penny invested can help towards achieving your financial goals.

Lots of us have good intentions when it comes to saving and investing. But if you sit on your hands and forget about putting money into the markets, a delay as small as one year could make a material difference to your eventual return, as we now reveal.

Best-buy cash accounts

If you had a lump sum equivalent to the current ISA limit and put it in an easy access Cash ISA, the best return you could hope to achieve is 1.4%.* This is based on the best-buy account at the time of writing.

Taking the investment route

At the end of the first year let’s assume you invested that cash (made up of the principal sum and the interest accrued) through a Stocks & Shares ISA.

We assume you choose a portfolio of 10 funds with a conservative targeted annual total return of 5% (made up of a 3% capital gain and 2% yield) after charges.

After three years you would be sitting on £16,983 and after five years £18,723, on the basis a 5% total return was achieved.

If you had invested the cash in a portfolio of 10 funds straight away then, assuming you managed the same 5% return, your portfolio would be worth an extra £602 at £17,585 and after five years an extra £659 at £19,382.**

Valuable lesson

The earlier you start investing for your future, the longer your money has to grow. However, it is important to remember that you are not guaranteed to make a profit with investing; you could even make a loss.

By reinvesting any income (in the form of dividends) from your portfolio you can take advantage of the power of compounding returns.

Using a dividend to buy shares in the fund or individual company which has issued it, you steadily increase your holdings and set yourself up for even more dividends down the line. These can also be reinvested, creating a virtuous circle of steadily increasing returns.

Here the advantages of investing early are even more apparent.

After three years the more cautious saver who kept their funds in cash before investing would be sat on £17,504 but the early bird investor would have accumulated a sum of £18,402.

After five years the investor who put cash in early would have built a pot of £20,911 against just £19,891 for the one who delayed.**

*Source: MoneySavingExpert.com 
**Source: SHARES magazine. Assumes 5% return made up of a 3% capital gain and 2% dividend yield with 10 funds bought online through the AJ Bell Youinvest platform at a trading cost of £4.95 each.