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Forget buy-to-let: I think the FTSE 100 offers less risk and greater potential to make £1m

With London house prices having recorded their biggest fall in over a decade in recent months, the outlook for many buy-to-let investors is challenging at the present time. Certainly, some regions are enjoying house price growth, but the uncertain prospects for the wider economy mean this may be curtailed to some degree.

As such, now could be the right time to invest in the FTSE 100, rather than in a buy-to-let. The index offers international exposure, as well as strong growth potential. It seems to offer good value for money, and may produce higher returns than buy-to-let investments over the long run.

International appeal

Since the FTSE 100 contains companies that operate in a variety of economies across the world, it offers greater diversity than buy-to-let investing. With the global economy continuing to grow at a rapid rate, this could mean that the index is able to capitalise on higher return prospects outside of the UK. As such, its performance may be less affected by Brexit-related uncertainty that could act as a drag on the UK’s economic growth to some degree over the near term.

For example, the index contains some of the world’s largest healthcare, banking and resources businesses. While they may have operations in the UK, in many cases they operate the vast majority of their businesses in international markets. For those stocks that report in sterling, they could even benefit from a boost to their earnings related to foreign currency translation should the pound weaken over the coming months.

The international focus of the FTSE 100 also reduces risk. It provides diversity, which could leave an investor less exposed to local economic challenges. Over the long run, this may produce smoother returns and less volatility.

Growth potential

While house prices in the UK are expensive relative to average incomes, the FTSE 100 trades only slightly higher than it did two decades ago. Certainly, it was overpriced in 1999, when dotcom ‘fever’ overcame many investors. However, even though the world economy has strong growth potential, the index’s valuation does not seem to fully reflect it at the present time. It currently has a dividend yield of 4.5%, which is among its highest-ever levels. This suggests that it offers a wide margin of safety, and may be able to produce impressive levels of growth in the long run.

Furthermore, with investments in the FTSE 100 not being subject to capital gains tax or dividend tax when held within an ISA or SIPP, the net return for an investor could be significantly stronger than for a buy-to-let. With the property market being a major topic of debate among politicians, it would be unsurprising for further tax changes to take place in areas such as stamp duty. As such, from a risk/reward perspective, the FTSE 100 could be a better means of making a million in the long run.

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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.