The rising gold price may dissuade some investors from buying cheap UK shares in a Stocks and Shares ISA. After all, the precious metal has surged to a new record high this year as an uncertain economic outlook has prompted greater risk aversion among investors.
However, the low prices available across the stock market and its track record of recovery suggest that building a diverse portfolio of UK shares today could prove to be a more profitable move over the long run.
Cheap UK shares
While your Stocks and Shares ISA may have rebounded to a large extent since this year’s stock market crash, a great number of UK shares are currently trading at low prices. In many cases, they’re significantly lower than their historic averages. That suggests they offer wide margins of safety.
In some cases, their low valuations may be merited due to weak financial prospects and ineffective strategies. However, many FTSE 100 and FTSE 250 stocks appear to have sound balance sheets and solid competitive positions. And that can lead to growing profitability over the long run. Therefore, buying them when they seem to offer good value for money could be a sound move.
Recovery potential after the market crash
Clearly, the market crash may have caused some Stocks and Shares ISA investors to switch their attention to gold. Its defensive status means that it has often outperformed other assets during periods of weak economic performance.
Although this trend may continue in the short run, over the long run the stock market is very likely to recover. It’s always been able to post new record highs following previous declines that, in many cases, have been exceptionally severe at the time. While this outcome may seem unlikely right now, monetary policy stimulus has the potential to catalyse the economy’s performance. This could lead to rising share prices as investors switch from defensive assets such as gold to riskier opportunities in the stock market.
Diversifying your Stocks and Shares ISA
Clearly, an uncertain near-term outlook means it’s crucial to build a diverse Stocks and Shares ISA. Holding a variety of UK shares that operate in a range of areas could reduce your reliance on a specific industry or country. This may enhance your overall returns and reduce risk.
Of course, such a strategy could take time to pay off. Risks, such as Brexit and coronavirus, could persist over the coming months. However, long-term investors have sufficient time for the stock market to deliver a comeback from its present challenges.
Through buying shares when they’re at a low ebb, you could maximise your returns in what’s likely to be a strong recovery over the coming years. In doing so, you could outperform gold and other defensive assets.
