Gold has long been viewed as a safe haven for investors. It holds its value well and acts as a hedge against inflation.
But when it comes to building wealth and aiming to retire early, I’m convinced there’s a better approach. Namely, investing in undervalued FTSE 100 stocks.
Gold vs FTSE 100 stocks
In my view, compared to buying gold, this strategy offers several advantages that make it a superior approach for building and retaining wealth.
First of all, many FTSE 100 shares pay dividends, providing a source of regular income. On the other hand, gold doesn’t generate an ounce of income. And for investors looking to retire early, a consistent stream of dividend income can be invaluable in covering living expenses.
More importantly for me, the shiny yellow metal just doesn’t have the same long-term growth potential as equities. While its price usually rises during turbulent times, the stock market has historically outperformed gold in the long run.
That said, I wouldn’t completely rule out investing in gold. For example, I think it could earn its place as a means of diversifying my portfolio.
After all, when it comes to portfolio diversification, finding investments and assets that are not closely correlated with one another is critical. And gold has historically had a negative correlation with stocks, making it advantageous in this sense.
Finding undervalued shares
Nonetheless, I’d aim to dedicate the bulk of my portfolio to high-quality UK shares. In fact, a handful of them look particularly cheap to me at the moment.
For instance, Barclays has a P/E ratio of 5.1, suggesting to me that the market could be undervaluing its shares. Back in July, the British bank reported half-year income of £13.5bn, which represents a 9% rise.
Higher interest rate environments and increased US card balances primarily drove growth, offsetting declines in the investment bank.
In addition, the handsome 4.5% yield raises the prospect of me receiving an attractive income stream if I was to invest.
Building wealth and retiring early
To build sufficient wealth to retire early, I’d reinvest my dividends to benefit from the power of compound returns. In so doing, I would use my dividend income to purchase additional shares in the same company.
Over time, these reinvested dividends generate their own dividends, creating a compounding effect that will accelerate my wealth growth and shorten my journey towards financial independence and early retirement.
While reinvesting dividends can greatly enhance wealth accumulation through compound returns, it’s essential that I remain mindful of the inherent risks in the market.
For example, volatility, economic downturns and unexpected catastrophic events will all affect the performance of my investments. This could substantially impact the compounding effect and the achievement of my long-term financial goals.
Nevertheless, by keeping my portfolio diversified and adapting a long-term investment horizon to smooth out the market peaks and troughs, I’ll be well-positioned to mitigate these risks.
