Deciding where to invest your first £500, or any other amount, can be challenging. The internet has made a wider range of assets available than ever before, and each have their pros and cons.
With the prospects for the world economy uncertain at present, many investors have become more upbeat about the prospects for gold. Its status as a defensive asset could mean it offers less volatility than other assets, such as shares.
However, with the FTSE 100 offering a high yield, a low valuation, and long-term growth potential, it could be a better place to invest. It may improve your financial prospects to a greater degree than gold, or any other asset.
FTSE 100 potential
With the FTSE 100 currently having a dividend yield of around 4.2%, its income potential is high compared to its historic levels. This could make it much more attractive than gold, with the precious metal not providing an income to its holders. At a time when interest rates are low and many investors are struggling to generate an inflation-beating income from their capital, a high income return could be a useful ally.
The FTSE 100’s high income return also suggests it could deliver strong total returns in the long run. As a cyclical index, its performance ebbs and flows over the long run. As such, capitalising on its relatively attractive price level at the present time could lead to high returns in the coming years, with many of its members currently having ratings below their long-term averages.
An uncertain future?
By contrast, gold’s future returns could be lower than many investors are currently expecting. Having risen to relatively high levels over the past couple of years, there may be reduced scope for further growth in its price level.
Gold has benefitted from an uncertain economic outlook for the world economy. While that still exists, the ‘phase one’ trade deal between the US and China, as well as progress on Brexit, could mean investors adopt an increasingly bullish outlook on the prospects for the global economy. This could stimulate demand for riskier assets, such as FTSE 100 shares, and may lead to a strong performance from the index.
In addition, gold has benefitted form lower US interest rates in recent years. While they may continue to be low in the short term, the potential for them to rise could negatively impact on the precious metal’s performance to a larger degree than that of the FTSE 100.
While gold is a defensive asset, it doesn’t provide investors with diversification. Buying a FTSE 100 tracker fund, or individual shares, reduces your exposure to a specific geography or sector, and could improve your risk/reward ratio. As such, now could be the right time to buy FTSE 100 dividend stocks, rather that rely on gold’s performance over 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.