The Motley Fool

Forget gold! Here’s how investing in the FTSE 100 could make you a million

Making a million is never going to be a quick or easy process. As such, investors who are seeking a seven-figure portfolio may be better off adopting a long-term investment strategy that focuses on the growth prospects for a specific investment over a period of years, rather than months.

While gold may offer defensive appeal in the near term while US interest rates are low and investor sentiment is weak, it may be unable to keep pace with the long-term return prospects of the FTSE 100. Through buying good value shares which have growth potential, rather than holding gold, you may be able to improve your chances of making a million.

Short-term appeal

In the short run, the gold price could continue to outperform the FTSE 100. The precious metal gained over 15% in 2019 and has risen by over 4% in January, partly as a result of investor uncertainty regarding the world economy. The threat posed by the spread of coronavirus, political uncertainty in Europe, and geopolitical risks in the Middle East could combine to produce a challenging period for risky assets such as shares.

Since gold has a track record as a defensive asset that’s an effective store of wealth, it could continue to be popular among increasingly risk-averse investors. By contrast, the prospect of a slowing global economy may mean FTSE 100 shares fall out of favour with investors as their potential for profit growth seems to be increasingly limited.

Long-term opportunities

While many investors may feel that buying gold could lead to higher profits and a greater chance of making a million, focusing your capital on shares could be a better long-term move. The track record of the FTSE 100 shows it has always experienced cyclicality. Its bull and bear markets  have never lasted in perpetuity, and the latter is therefore an opportunity for investors to capitalise on low valuations ahead of a return to more upbeat trading conditions.

Although the FTSE 100 isn’t currently in a bear market, the valuations of many of its members suggest investors are pricing in economic challenges which may not materialise. This could prove to be an opportunity to buy shares in high-quality businesses that offer earnings growth potential while they trade at a wide discount to their intrinsic values. A high rate of return may be the end result of this strategy over the long run, although it could lead to paper losses due to market volatility in the short run.

Time horizon

Clearly, your time horizon will impact on your capacity to take risk. However, making a million is likely to require a long timeframe which allows compounding to positively impact on your returns. As such, taking a long-term view and purchasing undervalued FTSE 100 shares through a buy-and-hold strategy could prove to be a more likely means of making a million compared to buying a defensive asset such as gold.

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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.