The gold price recently broke through the $1,550/oz. level. The yellow metal is now trading at the highest level seen since 2013. Over the last year alone, gold has risen by almost 23%.
By contrast, the FTSE 100 has gained just 11% over the same period.
Faced with these numbers, you might conclude that gold is likely to be a more profitable investment than the stock market.
I’m not sure that’s true. Today I want to explain why I believe the stock market is still the most reliable way to make money with limited amounts of cash.
Why I don’t own gold
The gold price has performed well over the last year. But take a longer view and the picture isn’t quite so bright. Over the last 10 years, the FTSE 100 has risen by more than 40%. The price of gold has only climbed about 35%.
That may not seem like a big difference, but it doesn’t include the dividends paid by the FTSE 100 each year. Over a 10-year period, these add up to a tidy sum.
I estimate that the FTSE 100 dividend yield has averaged about 3.8% each year over the last 10 years. That’s an extra 38%, in addition to the 40% price gain delivered by the index.
Added together, investors in a FTSE 100 tracker fund have probably seen a total return of 75% to 80% over the last decade.
During the same period, gold investors have got just 35%. Worse still, they’ve received no income and have probably had to pay annual fees for storage or ETF management.
This is the main reason why I don’t own gold. I don’t really care if my investment is under water from time to time. That can happen in the stock market, but gold never grows and it never generates any income. It’s not a productive asset.
I prefer to own shares, mostly dividend stocks. They represent a stake in real businesses that generate cash, profits and can grow. When dividends are included, I’d always back the stock market to outperform gold over long periods.
Cheap and tax free
If you’ve got £5k to invest and would like to get started in the stock market, then I’d suggest a couple of options.
The cheapest and simplest is probably to open a tax-free Stocks and Shares ISA and use it to put your cash into a FTSE 100 tracker fund.
The long-term average annual return from the UK stock market is about 8%. My sums suggest that £5,000 invested in this way today could be worth £23,300 in 20 years, or £50,300 in 30 years’ time.
If you’d like to aim higher and try to beat the market over the long term, then investing in individual stocks might be the best approach. With £5,000, your options are slightly more limited.
In my opinion, the minimum viable investment in a single stock is £500. Any less than this and I think trading costs and fees will eat up too much of your cash. Investing £500 per stock would enable you to build up a portfolio of 10 handpicked stocks.
If you’re interested in investing and willing to do some research, then this is probably the option I’d choose.
Roland Head 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.