Despite its recent rebound, the FTSE 100 is still down by 20% since the start of the year. During that time, the price of gold has risen by around 13%. Therefore, some investors may feel that the precious metal could prove to be a more profitable investment over the long run.
However, the FTSE 100 has an excellent track record of recovering from its challenging periods. As such, investing £5k, or any other amount, in bargain large-cap shares today could enable you to benefit from the index’s likely turnaround.
FTSE 100 recovery potential
A FTSE 100 market recovery now seems to be more likely than it was a few weeks ago. Many of the countries that have put lockdowns in place in response to coronavirus are starting to unveil their plans to gradually reopen their economies. This may not mean that the world economy avoids a recession this year, but it could lead to improving financial prospects for a wide range of businesses that lead to a stock market recovery.
Of course, a FTSE 100 recovery has always been a likely event – even when it seemed anything but during the index’s March lows. The main reason for this is that the index has a solid track record of delivering successful turnarounds following its most challenging periods. In doing so, it has risen from 1,000 points at inception in 1984 to over 6,000 points at the present time. That is despite experiencing crises such as the 1987 crash, the tech bubble and the financial crisis.
Ultimately, investor sentiment improves as the economic outlook strengthens. This could mean that demand for perceived safer assets such as gold declines to a large degree. Investors could become less risk-averse and pursue assets that offer greater long-term growth potential.
Clearly, investing in FTSE 100 shares today could produce paper losses in the short run. Risks such as the prospect of a second wave of coronavirus, as well as geopolitical tensions between the US and China, may cause stock prices to decline over the coming months. Therefore, gold and other less risky assets could outperform the stock market on a short-term basis should investor sentiment weaken compared to its level today.
However, over the long run, the track record of the FTSE 100 suggests that it offers investment potential when many of its members trade on low valuations. Investors who have bought shares when they offer wide margins of safety following a market crash have often benefited the most from the subsequent recovery. They have been able to obtain the most favourable risk/reward opportunities.
Therefore, now could be the right time to buy a diverse range of high-quality businesses for the long term. They have the potential to benefit from a stock market recovery. And they could deliver returns that are above and beyond those offered by other mainstream assets such as gold.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.