Gold has experienced an exciting year with its price rising rapidly. Geopolitical uncertainty has boosted its value as cautious investors run to the safe-haven asset for cover.
It’s always a sensible option to diversify your investments and I think this includes owning some gold. It’s been a coveted precious metal for centuries and that’s unlikely to change.
That said, I don’t think it’s a good time to buy gold when its price is so high. It’s a volatile commodity and if calm is restored to the global economy, then the price of gold will surely plummet. It doesn’t offer any kind of income and if you buy physical gold, you’ve got to store it safely.
The magic number
An alternative way to save for the future is investing in the stock market.
Waiting until you’ve saved enough to invest is not the wisest strategy. You don’t need a big lump sum like £10k, £20k or £50k to get started. Obviously, a bigger starting pot would be nice, but it’s unnecessary.
£7k may seem like a strange amount to aim for. It’s not a magic number, you could start with more, or even less. But for many, the elusive £10k or £20k reserve can prove an impossible feat. Unexpected bills appear, important events demand our savings, or life gets in the way and the time spent saving never seems to end.
Having a more obscure sum like £7k in mind can be a more achievable goal.
Less shiny, more lucrative
Once you have your pot of money ready to invest, what next?
A Stocks and Shares ISA is a tried and tested way to manage your investments. It’s easy to set up and straightforward to manage. Apply through an online broker such as Hargreaves Lansdown or Interactive Investor and deposit your nest egg.
You can then invest in index funds, bonds, exchange-traded funds (ETF’s) or individual company stocks.
If buying shares in individual companies, I think sticking to the FTSE 350 companies is the safest route to success. The FTSE 350 includes both the FTSE 100 and FTSE 250 indices. Together they contain the top 350 UK listed companies, sorted by market capitalisation.
Compounding is the key to wealth accumulation. By investing your initial £7k in funds with a fixed interest rate or stocks with juicy dividend yields, achieving a million pounds is not as impossible as it may sound.
An 8% average annual return, topped up with £250 a month, could realise over £1m in 40 years. If you could afford to up your monthly contribution to £550, you could achieve £2m in the same time frame.
As shiny and enticing as gold can be, I prefer the stock market as an investment vehicle for future wealth. From the time of its inception in 1984 at 1,000 points, the FTSE 100 index has risen 658%. Founded in 1996, the FTSE 250 has risen over 391% since then. Combined, the FTSE 350 has risen 115% since 1996.
Although fluctuations are part and parcel of the world economy, overall, these indices have prevailed and increased in value. I think this proves that an 8% average annual return is not an unachievable daydream. A disciplined and patient approach to investing is worth a try. It has already helped many investors realise the dream of turning sums as small as £7k into £1m.
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Kirsteen 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.