Uncertainty about the future of the world economy may have contributed to a rise in the gold price this year, as well as a period of volatility for the FTSE 100. However, the track record of the latter shows that it has always recovered from its challenging periods to post higher highs.
As such, it may be a logical step for an investor with £20k, or any other amount, to buy FTSE 100 shares while they trade at lower prices in order to maximise their profitability.
Although this may mean there is short-term risk that could lead to paper losses, long-term investors may be able to use the cyclicality of the stock market to their advantage in order to increase their chances of retiring early.
The FTSE 100 has experienced major bear markets in recent decades, from which it has always posted successful recoveries. For example, the global financial crisis caused the index’s price level to fall by around half, while the tech bubble previous to it also produced a period of significant losses for investors.
Following both of those events, it took time for the FTSE 100 to recover. However, it went on to reach new record highs, while paying dividends in the meantime. This has meant that the index has recorded an annualised total return of around 7% in the last 10 years – even after its recent volatile performance is taken into account.
Therefore, even if there are further challenges in the near term from issues such as political risks in the US and Europe, as well as a global trade war, the index is likely to recover in the long run. This means that buying stocks while they trade on low valuations may prove to be a logical strategy.
Clearly, the most obvious action for any investor to take when the FTSE 100 is experiencing a challenging period is to buy defensive assets such as gold. They may provide the opportunity to generate gains in the short run, since the gold price may move higher due to its defensive credentials. Indeed, the gold price has moved higher in 2019 due in part to weak investor sentiment that may persist in the short run.
However, investors who fail to capitalise on low valuations in the FTSE 100 may miss out on its long-term growth potential. After all, the stock market can quickly switch from being in a downward phase to being in a recovery period, since investor sentiment can quickly shift towards being bullish as economic data improves.
Therefore, investors may be better off capitalising on low valuations within the FTSE 100 today, rather than seeking to limit their short-term paper losses through gold. In many instances, FTSE 100 stocks currently have valuations that are below their historic averages. This could mean that they offer highly favourable risk/reward opportunities that ultimately lead to them outperforming the gold price.
As such, now could be the right time to focus your retirement capital on FTSE 100 shares, rather than on gold – even if taking more risk over the short run does not feel like the natural response to a volatile stock market. Doing so could improve your financial future and boost your chances of retiring early.
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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.