Recent economic uncertainty has meant that many investors have decided to invest in gold. It has historically been seen as a store of wealth that can offer defensive characteristics during periods of economic uncertainty. As such, its price has moved higher in recent months after a mixed performance in previous years.
While the gold price could move up in the coming months, in the long run an investment in shares could offer greater return potential. With the FTSE 100 and FTSE 250 having experienced turbulent periods of late, now could be a good time to capitalise on their low valuations to build a portfolio that increases your chances of making a million.
Investing in physical gold or a gold ETF could limit an investor’s long-term return prospects. Certainly, a cut in US interest rates or economic uncertainty may mean that the price of gold moves higher in the short run. But in the long run, investor demand for the precious metal could decline as the world economy continues to grow.
In other words, investor sentiment will not remain weak in perpetuity. Once it improves, the performance of the gold price could disappoint due to weaker levels of demand as investors focus on riskier assets.
Stock market growth potential
By contrast, the stock market could offer an increasingly appealing investment opportunity as it experiences a volatile period. In many cases, the valuations of mid and large-cap shares now appear to be more attractive than they have been for some time. This could produce an increasingly favourable risk/reward opportunity for investors that allows them to generate high returns in the long run.
In fact, the cyclicality of the stock market shows that buying during periods of falling share prices can be a sound strategy for long-term investors. Doing so over the last couple of decades, for example, would have allowed an investor to capitalise on the fallout from the tech bubble, as well as the lows experienced during the financial crisis. Since the FTSE 100 and FTSE 250 have always recovered from their lows to post record highs, they seem likely to follow this pattern in the coming years.
One drawback of investing in physical gold or a gold ETF is their lack of income. This could be relevant to all investors, since history shows that a large proportion of total returns are contributed by dividends and their subsequent reinvestment.
As such, buying FTSE 100 and FTSE 250 shares while they offer relatively high dividend yields could be a highly profitable move for investors. Not only could they provide a passive income in the short run which may be used to add to your portfolio should stock markets fall further in the near term, their dividend yields suggest that they offer wide margins of safety. This could improve your chances of making a million, as well as increase your prospects of beating the returns available on gold over the long run.
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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.