Buying gold has become increasingly popular among investors over the past year. One reason for this could be the continued uncertainty facing the world economy. Risks such as political change in the US and Europe, geopolitical challenges in the Middle East and the spread of coronavirus may have caused investors to seek defensive assets, such as the precious metal.
However, buying FTSE 100 shares instead of gold could be a better idea in the long run. In many cases, they offer good value for money at the present time. And, should there be a market crash, they may become even more attractive due to their long-term recovery potential.
The stock market’s track record shows it has always been a highly cyclical index. In other words, it has experienced periods of booms, and periods of decline. However, its overall trajectory has always been upwards. For example, despite facing challenges such as the 1987 crash, the dotcom bubble, and the financial crisis, the FTSE 100 has risen by a multiple of 7.5 times since its inception in 1984.
As such, its periods of decline present excellent buying opportunities for long-term investors. Not only do they offer the opportunity to access the long-term growth rate of the FTSE 100, they also provide the chance to do so from an attractive starting point. As such, buyers of shares during bear markets could obtain favourable risk/reward ratios that lead to strong total returns in the long run.
An uncertain outlook
Since the world economy currently faces a number of risks, investor sentiment may be relatively weak. This could mean there are a number of buying opportunities available within the FTSE 100. Sectors such as banking, retail and property appear to have multiple stocks that trade on low ratings and that offer high yields compared to their historic levels. Therefore, now could be an opportune moment to buy a diverse range of large-cap shares, and hold them for the long run.
Should there be a decline in share prices over the coming months, which wouldn’t be a major surprise given the risks faced by the world economy, buying opportunities within the FTSE 100 could become more plentiful. Certainly, investors may experience paper losses in the short run, but the index’s track record of recovery suggests they may experience strong turnarounds over the long run.
While gold’s price may move higher in the short run due to the aforementioned risks facing the global economy, its current level suggests it may not offer a margin of safety. As such, it may be a better idea to capitalise on low prices across the FTSE 100 right now, and to continue to do so should the index experience a challenging period in the coming months. After all, it has overcome major threats in the past, and is likely to continue to do so in future.
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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.