Bitcoin and gold have enjoyed a positive 12 months. The crypto-currency is up a whopping 135%, while the precious metal has climbed 22%, and many investors will be considering adding them to their portfolios. But I would urge caution. Both could fall as rapidly as they rose, and stay low for the long term.
Global stock markets also did well, rising 25% over the year, according to MSCI, and I believe they offer a far better risk-to-reward opportunity in the longer run. Especially with many FTSE 100 and FTSE 250 shares trading at low valuations and offering generous yields. This is where I would start my quest for a £1m portfolio.
I hold one whole Bitcoin myself, which I bought for around $500. I’m not buying any more at today’s price of $8,385, though. The crypto is just too volatile, as are others such as Ethereum, Litecoin and Ripple. Their underlying value is impossible to gauge, and their practical uses difficult to spot. That makes Bitcoin pure speculation.
Plus there is always the danger you could lose your virtual asset in a moment. An estimated four million Bitcoins worth more than $33bn have been lost. This is no foundation for a £1m retirement portfolio.
Gold has superior credentials, having been a store of value for thousands of years, but it is wrong to call it a safe haven. The price can be volatile, and while gold surges when investors are nervous and wary of stock markets, it can fall sharply when sentiment improves.
Like Bitcoin, gold does not pay interest or dividends. So you are wholly dependent on price movements to make money, and these can be erratic. Buying after the recent surge is risky. Investing for retirement is a long-term game, and over lengthy periods, I believe the stock market is likely to come out on top.
Stocks and shares
Equities can be risky too, of course. The FTSE 100 and FTSE 250 could be in for a volatile year amid uncertainty over Brexit trade talks and other issues that could affect the global economy.
However, stock markets always have their ups and downs and using dips to pick up high-quality businesses at bargain prices could help you build a balanced portfolio of diverse companies with healthy balance sheets, steady earnings and ample cash flows. And if you do so through your Stocks and Shares ISA allowance, you can take your returns free of tax.
You should reinvest all your dividend income back into your portfolio to buy more stock. Remember, neither Bitcoin nor gold generate income in this way.
The FTSE 100 currently yields 4.34% a year, which means you can build your wealth even if share prices stay flat. The index peaked at 6,930 on 31 December 1999, and didn’t recapture that high until February 2015, some 15 years later. Despite that, it returned 66% over the period, from reinvested dividends alone.
By using your £20k ISA allowance every year, you have a far better chance of making a tax-free million than gambling on Bitcoin and gold.
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Harvey Jones 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.