The FTSE 100 may have fallen by around 15% since the start of the year, but the price of gold has surged to its highest level in over seven years. Investors are increasingly flocking to less risky assets, and gold’s track record as a store of wealth means that it could move higher in the short run.
However, in the long run the FTSE 100 could deliver impressive returns. It now appears to offer a wide margin of safety, while it has a solid track record of recovery. Therefore, investors who are looking to build a seven-figure portfolio in the long run may be better off buying undervalued FTSE 100 shares today rather than holding expensive gold.
Gold has become increasingly popular in recent weeks due to its defensive characteristics. It has been viewed as a store of wealth for many years, and its price has therefore often risen during periods of economic uncertainty.
With the ultimate impact of the spread of the coronavirus on the world economy’s growth rate still a ‘known unknown’, it would be unsurprising for investor sentiment to further weaken in the short run. Investors may, therefore, seek to reduce the risks they face through holding gold. This may lead to a rise in its price in the short run.
FTSE 100 appeal
At the same time, the FTSE 100 looks set to experience continued uncertainty in the short run. While this may mean that investors record paper losses over the coming weeks and months, over the coming years they may benefit from a recovery in the index’s price level.
The FTSE 100 has always delivered new record highs following its various bear markets in the past. As such, buying a wide range of companies while they trade on low valuations could be a sound means of obtaining a favourable risk/reward ratio that catalyses your portfolio’s performance in the long run. I would rather do that than buy an asset like gold that may see its price falling again once stock markets start to rise.
For example, stocks in sectors such as consumer goods, financial services and resources are currently trading on valuations that are significantly lower than their long-term averages. This suggests that investors may have factored-in the prospect of a negative impact from the coronavirus on their earnings. This could mean that they offer wide margins of safety that improve the risk/reward ratio of your portfolio.
A logical strategy
The task of building a £1m portfolio is likely to be made easier through buying assets while they trade at low prices, and selling them when they trade at high prices. In order for shares, or any other asset, to be considered ‘cheap’, there usually must be significant risks present. As such, the near-term outlook can be highly uncertain.
However, through focusing on company fundamentals and having a long-term outlook, you can capitalise on the low valuations currently present in the FTSE 100. It may take time for the index to recover, but its track record shows that it has always achieved this goal and it could, therefore, positively impact on your chances of making a million.
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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.