The Motley Fool

Forget gold and Bitcoin! Here’s how I’d invest £20k today to make a million

The popularity of gold and Bitcoin over recent months suggests investors are becoming increasingly optimistic about their prospects. In the first month of 2020, for example, gold gained 4% and the price of Bitcoin moved 25% higher. This follows successful 2019 calendar years for the two assets, as investors sought alternatives to stocks during what was a volatile 12 months for equities.

Looking ahead, indexes such as the FTSE 100 could offer a superior risk/reward opportunity compared to Bitcoin and gold. Undervalued shares that have a solid track record of recovery may outpace the precious metal and virtual currency, and could improve your chances of making a million.

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Strong return potential

The FTSE 100’s track record of delivering high single-digit annual returns over the long run may not sound all that impressive compared to the recent performances of gold and Bitcoin. However, the index currently appears to offer relatively sound growth prospects. Since around two thirds of its income is derived from non-UK markets, with many of its companies having exposure to emerging economies, the index’s growth rate could prove to be highly impressive.

In addition, the FTSE 100 currently has a dividend yield of around 4.4%. This suggests it offers a wide margin of safety, since it’s above the index’s long-term average yield. As such, its growth rate could prove to be more impressive in future than it has been in the past for those investors who are willing to purchase stocks, while risks such as coronavirus and US political uncertainty weigh on wider market sentiment.

Compound growth

Even if the FTSE 100 delivers a similar return in future to its past, an investment of £20k could become worth over £1m within an investor’s lifetime. In fact, assuming a 9% annual total return, a £20k investment in the FTSE 100 could be worth seven figures after a period of 46 years. Although this is clearly an extended period of time, it serves to highlight the long-term potential of the FTSE 100 and the impact which compounding can have on your overall returns.

Clearly, investing an initial amount of capital and then continuing to invest on a regular basis would reduce the amount of time it takes to obtain a £1m portfolio. As such, a surprisingly large ending portfolio value could be more attainable than many investors realise.

Long-term approach

While gold and Bitcoin may continue to be popular among investors in the short run, they’re unlikely to provide uninterrupted growth in the long run. Bitcoin, for example, faces regulatory risks and its limited size may mean it cannot fully replace traditional currencies. Gold, meanwhile, may struggle to gain ground as investor sentiment improves over the long run due to it being a defensive asset.

Therefore, in the long run, the FTSE 100 could provide a relatively attractive means of generating high returns, and may be the best means through which to obtain a seven-figure portfolio.

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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.