With all the economic turmoil in recent months, it’s unsurprising to see the price of gold climb. The shiny yellow metal is arguably the most popular refuge to store wealth during times of uncertainty. It has many benefits, yet I feel investors could be short-changing themselves by choosing this commodity over FTSE 100 shares.
Since October 2022, the UK’s flagship index is up in double digits – and that’s not including dividends. By comparison, the price of gold has only delivered a mere 2.6% gain over the same period.
As it turns out, despite the economic headwinds, businesses are getting back on their feet. While the risk of a recession is still not zero, investors have caught on to the fact that the situation may not be as dire as initially anticipated – something I highlighted back in December.
With pessimism subsiding, the valuations of oversold stocks have started to recover. This trend has even enabled the index to reach a new all-time high in February. However, there still remain plenty of high-quality enterprises trading at a discount. And it’s no secret that buying and holding undervalued top-notch stocks for the long run is a proven recipe for building wealth. It may even pave the way for an earlier retirement.
Exploring FTSE 100 shares
As a market-cap-weighted index, a lot of the FTSE 100’S recovery can be explained by a handful of top performers like AstraZeneca. But while the pharmaceutical giant has garnered much attention in recent months, it’s far from the only opportunity for investors to capitalise on.
This index is home to the largest 100 companies listed on the London Stock Exchange. But that doesn’t mean all 100 stocks are worth buying. As a business, being large has some advantages when it comes to securing additional financing and having a more prominent reputation. However, it also comes with several drawbacks.
All too often, expansive businesses can become bloated with lower operational efficiency. And too much reliance on debt can start causing cracks in the balance sheet, especially now that interest rates are rising. Needless to say, those aren’t the kind of businesses investors should be looking for.
Instead, focus should be placed on finding the few FTSE 100 shares that remain well-funded, with wide competitive moats. The latter is particularly important for long-term success. Why? Because it can be one of the best defences against firms trying to steal market share.
Retiring early
Historically, FTSE 100 shares as a group have delivered an average annualised return of 8%, including dividends. That’s certainly nothing to scoff at. However, investors can potentially achieve a higher return by being more selective.
Even if a custom-tailored portfolio generates just an extra 2%, that’s enough to trim five years off the time it would take to build £1m when investing £500 each month.
Of course, it’s important to stress that stock picking, and investing in general, aren’t guaranteed to deliver positive returns. Suppose a portfolio of even FTSE 100 shares is poorly constructed and badly maintained. In that case, investors will likely end up destroying wealth rather than creating it.
However, provided the best stocks are selected and investors take a calm, disciplined approach to investing, these risks can be managed, paving the way to financial freedom in the long run.
