Many investors compare returns from the stock market to alternative investments to see whether they are achieving an appropriate risk-adjusted return on their money. Think about it — if you are an income investor and could get 5% interest on a Cash ISA then why would you invest in a stock that has a dividend yield of 5%? The lower risk on the Cash ISA could cause some investors to reduce their stock holdings and increase cash balances instead.
Unfortunately, you cannot get 5% in a Cash ISA so it is worth looking at the returns from both gold and Bitcoin over the past few weeks to see whether there is merit in buying at current levels versus the stock market.
Traditionally, returns on gold increase during periods of uncertainty. Sure, it doesn’t pay you any dividends like a stock does, but it does hold intrinsic value that you can store (some say hoard) during times when other assets classes are not performing well.
Has there been uncertainty recently? Definitely. The events in Iran last week sent shock waves around the world. This story alone was a large contributor to the gold rally that saw it reach almost $1,600 per ounce, a seven-year high.
While I am interested in gold, I do not want to base my investment planning on such awful events. But if I did my research and felt that I would like to invest in gold for the long term, rather than buying gold itself, I would prefer to play it via the stock market by buying into exchange traded funds (ETFs) that track the price of gold. Two examples of this are the iShares Physical Gold ETF and the Invesco Physical Gold ETF. These can be bought and sold like you would buy shares in a listed company. Just remember though that you own shares, not gold itself.
Does Bitcoin beat shares? Yesterday it rallied to $8,000, a level not seen since November 2019. This is a short-term rally of almost 15% from Friday, beating a year’s worth of performance from the FTSE 100 in just three days.
However, as both I and my Foolish colleagues have noted in the past, Bitcoin exhibits very high volatility. Due to the virtual impossibility of pinning an intrinsic value on the cryptocurrency, investing in it is hard.
At the beginning of this piece, I mentioned comparing risk-adjusted returns, and this is very valid when looking at Bitcoin. The rally of 15% is the bare minimum needed to compensate for the additional risk you take when investing in it versus the stock of a blue-chip company.
Also, I can look at the price movement of a stock such as Lloyds Banking Group and say with some confidence that ‘reason X’ contributed to a rally seen that day. However, with the rally in Bitcoin, I find it hard to pin a fundamental reason on it. For me, this makes me want to stay with share investing over Bitcoin.
Overall, the recent rally behind both of these alternative investments means investors are likely to wonder whether they should shift some funds to them from traditional stocks. I think gold could be a good buy (and can act as a hedge for your stock investments), but bought through an ETF. And I will definitely be staying away from Bitcoin.
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Jonathan Smith owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.