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Forget Cash ISAs and gold! I’m buying the FTSE 100 to retire early

The performance of the FTSE 100 in 2020 has been hugely disappointing. The blue-chip index has experienced one of its fastest and most severe crashes of all time.

Following this decline, many investors are, understandably, turning to defensive assets, such as gold and Cash ISAs. This rush to safety has pushed the price of the yellow metal up to a seven-year high in recent weeks. Unfortunately, the demand for safety hasn’t had the same impact on the interest rate for Cash ISAs.

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The highest easy access Cash ISA rate on the market at the moment is just 1.25%.

FTSE 100 recovery

While investor sentiment towards stocks has dropped in recent weeks, it’s likely to improve in the long run. Indeed, following previous FTSE 100 bear markets, confidence has steadily returned over the medium term. In the years following a substantial drawdown, the market has gone on to outperform gold on many occasions.

This suggests that prospects for gold are more limited than those of undervalued FTSE 100 stocks. The FTSE 100 also seems to offer a much better proposition than Cash ISAs today. The UK’s leading index currently supports a dividend yield of around 4.8%. This implies it offers the potential for income as well as capital growth over the long run.

Mixed outlook

We don’t know what the future holds for the FTSE 100, the gold price, or Cash ISA interest rates. However, with the economic effects of the coronavirus crisis still unfolding, it’s clear investors may see more volatility in the near term.

Nevertheless, many FTSE 100 shares appear to offer excellent value for money at present. For example, some of its top blue-chips have experienced falls of over 50% since the start of the year.

Some of these companies have seen their values decline despite having strong balance sheets and wide economic moats. Others have seen significant share price falls, despite informing investors that profits are holding up relatively well.

These advantages imply that while investor sentiment could remain weak throughout 2020 and into 2021, they could produce a positive long-term performance. Research shows that over the past 120 years, UK stocks have produced an average annual return of 5.5%, after inflation. Cash and gold have lagged this performance.

Conclusion

Considering all of the above, while the outlook for the FTSE 100 is unclear at present, now could be the right time to buy a diverse range of undervalued blue-chips.

It’s unlikely that we’ve seen the last of the markets decline in the short run. News regarding coronavirus is likely to continue to have a significant impact on investor sentiment for the foreseeable future.

Nonetheless, in the long run, FTSE 100 stocks could offer impressive total returns relative to other assets, such as gold and Cash ISAs, as the economy returns to normal and investor sentiment improves.

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Rupert Hargreaves 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.