The Motley Fool

Forget gold and buy-to-let. I’d buy cheap FTSE 100 shares today to make a million

The recent FTSE 100 crash and subsequent rally highlight how volatile the stock market can be. As such, many investors may feel that gold and buy-to-let properties offer greater stability, as well as long-term growth potential.

However, the low valuations currently on offer across the FTSE 100 suggest it can deliver strong returns in the long run. As such, it could be a better means of making a million over the coming years than buying gold or buy-to-let properties.

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FTSE 100 return potential

The FTSE 100’s near-term performance could continue to be highly volatile. There’s still a lack of clarity about how the coronavirus pandemic will progress. For example, there could be a second wave later in the year, or there may be challenges in finding a suitable treatment for it.

As such, company earnings and investor sentiment may change rapidly in a short space of time. This could lead to sudden falls in the index’s price level.

However, over the long run, the FTSE 100’s return potential continues to be relatively attractive. Since its inception in 1984, the index has recorded a total annualised return in excess of 8%. Therefore, investors who are able to adopt a long-term timeframe can generate strong returns through buying a diverse range of large-cap shares.

Low valuations

The future prospects of the FTSE 100 could be even more attractive than they’ve been in the past. Many of its incumbents trade on valuations significantly below their long-term averages. This could suggest they offer wide margins of safety that allow investors to generate impressive capital returns as the economy gradually recovers.

By contrast, valuations for buy-to-let investors may prove to be highly unattractive. The average house price versus average income has been at record levels over recent years. This suggests house prices are largely unaffordable – especially without government policies such as Help to Buy that are unlikely to last in perpetuity.

Likewise, the gold price is close to an all-time high at present. It could move even higher in the short run should investor sentiment towards riskier assets remain weak. But, over the long term, there may be less scope to generate high capital returns from gold than from undervalued FTSE 100 shares.

Millionaire potential

Investors who’ve a long-term time horizon can generate a seven-figure portfolio through investing regularly in FTSE 100 shares. For example, assuming an 8% annual total return on a monthly investment of £500, your portfolio could be valued at £1m after 35 years.

Certainly, not every investor has that amount of money to invest east month. They may also not have a 35-year time horizon. But the example serves to show that the FTSE 100 can produce a surprisingly large nest egg over the long run. Especially while it offers attractive valuations following its recent market crash.

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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.