Gold is a popular asset class among investors and has a far more proven track record than FTSE 100 shares. After all, it has been used for thousands of years. Gold prices are up by 8% over the last 12 months versus the FTSE 100’s 1.1% (not including dividends). So the shiny yellow metal may seem like the better investment.
However, despite the UK’s flagship shares lagging this year over long periods, the performance of these asset classes flip. That’s not exactly surprising, considering gold’s primary use is as a store of value, not as a vehicle for growth.
For investors with plenty of retirement money in the bank, gold could be a sensible investment. But for those still building up their capital, equities are likely to deliver far better returns over the long run. That’s especially true in 2024, with so many top-notch stocks still trading at significant discounts, thanks to the recent correction.
Where are the bargains?
Throughout history, some of the best periods to buy shares have been during and shortly after a severe market downturn. That’s because over-emotional investors panicking to mitigate losses tend to make rash decisions. These typically result in top-notch companies being sold off for no good reason.
Investors capable of spotting such mistakes can then swoop in and start snapping up shares significantly below their intrinsic value. And in the long run, when investor sentiment improves, these value stocks can end up delivering spectacular double- or even triple-digit returns.
With the FTSE 100 index trading at levels near its highest point on record, it looks like such opportunities don’t exist. However, it’s important to remember that the UK’s flagship index, just like the S&P 500 across the pond, is weighted by market capitalisation. This means the largest companies in the index like AstraZeneca and Shell are driving up the price. Meanwhile the smaller businesses have far less influence. And it’s the latter type of constituents which look like bargains today.
Separating winners from losers
Not every sold-off stock is going to deliver spectacular returns. In fact, with the macroeconomic environment drastically shifting in the last few years, many of the over-leveraged firms are likely going to take considerable time to bounce back. And some might end up tumbling into the FTSE 250. In fact, that’s precisely what happened to Abrdn, Hiscox, Johnson Matthey, and Persimmon in September.
Therefore, simply buying up beaten-down FTSE 100 shares isn’t likely to meet performance expectations. Instead, investors need to spend time investigating why each constituent has tumbled. In many cases, there’s likely a good reason. Don’t forget that even panicking investors can have a justified reason to sell.
However, suppose investor concerns appear to be solely focused on a short-term challenge that a business has the resources to overcome? In that case, a buying opportunity may have emerged.
