9.64%! The reason why I plan to keep investing in UK stocks

The number of people buying UK shares has exploded in the last decade. This is a reflection of the poor returns offered by traditional financial products, such as savings accounts.

The boom in stock investment is not just a British phenomenon. All over the world, people are turning to the stock market to create long-term wealth.

Research into internet searches by CMC Markets illustrates how investor interest is rising. It says that the use of the search term ‘how to start trading’ has increased by 203% worldwide since 2004.

Searches for ‘how to get into trading’ have increased 178% in the last five years. And searches for ‘trading tips’ have jumped 195% over that period.

9.64% is a magic number

It’s no surprise that interest in stock investing continues to rocket. I remain an active buyer of UK stocks, even in these uncertain economic times.

Regular interest rate hikes from the end of 2021 have boosted the returns that savings account customers can earn. But the money you can make with something like a Cash ISA is still less than what you can buy London Stock Exchange sharing.

The highest paying cash ISA on the market today offers an interest rate of 3.4%. The product is provided by Chip, according to the price comparison website Moneysupermarket.com.

That’s a good rate compared to the average savers have had to make over the past decade. However, it is still far lower than the return long-term stock investors can realistically expect to enjoy.

Over the past 10 years, Stocks and Shares ISA investors have returned an average annual return of 9.64%. That’s according to financial services provider Moneyfarm.

The top is back

This is due to the magic of compounding. In simple terms, this involves reinvesting dividends so that interest on the initial investment can be generated also regarding shareholder payments received.

Let me show you how. We’ll assume that Chip continues to offer interest rates above 3.4% for the next 20 years (an unlikely scenario, as interest rates look set to drop again from the end of 2023).

If someone invests £300 a month in a Cash ISA, after twenty years, there will only be £100,770 in the account.

Now let’s say he uses £300 to buy UK stocks in his Stocks and Shares ISA. They will return just £197,950 if the rate of return matches that of the last decade (which is not guaranteed, of course).

That is almost double what they have made in their Cash ISA. And as time goes on, the difference between these products increases.

Time to invest!

So my current tactic is to continue to build my stock portfolio with the cash I have. I have exposure to bonds, and I have capital in a savings account. That diversification helps me reduce risk. But the largest part of my money is devoted to British stock investments.

And I think now is a good time to add to my portfolio. After the recent market volatility, I was able to buy some of the best stocks at low prices.