The appeal of lower-risk assets, such as gold and Cash ISAs, could remain high should the FTSE 100 experience a challenging near-term period. The index may have rebounded over the past two months, but a hugely challenging global economic outlook could lead to a further market crash later this year.
Despite this, investing in FTSE 100 stocks now could be a shrewd move for long-term investors. In many cases, stocks are cheap. That could make a more positive impact on your retirement prospects than gold or Cash ISAs.
Low risk and low return?
The recent market crash has understandably caused many investors to become cautious about the prospects for the FTSE 100. Therefore, demand for gold has increased. It has a long track record as a defensive asset that acts as a store of wealth during turbulent economic periods. This has catalysed its price so that it now trades close to a record high.
However, investor sentiment is likely to improve towards riskier assets such as equities over the long run. After all, the world economy has always recovered from its challenging periods. The FTSE 100 has a solid track record of posting new record highs following its various bear markets. Therefore, while gold may protect your capital in the short run from an uncertain economic outlook, its potential to deliver returns that beat the stock market over the long run may be somewhat more limited.
Likewise, returns from Cash ISAs could be hugely disappointing in the coming years. Low interest rates look set to remain in place over the next few years. Especially as the Bank of England seeks to stimulate the economy after what is now likely to be a significant recession in 2020. Cash ISAs may even fail to offer inflation-beating returns. And that reduces your spending power, making it more difficult to obtain a substantial retirement nest egg in the long run.
FTSE 100 risk/reward prospects
In return for the FTSE 100’s long-term recovery potential, investors may have to accept a period of high volatility and uncertainty. After all, the lockdowns imposed across the world to contain coronavirus are an unprecedented event. They could cause significant disruption for many large-cap shares in the coming months. This makes the index a far riskier investment prospect than buying gold or having a Cash ISA.
However, over the long run, the FTSE 100’s low valuations and its track record of recovery suggest its return prospects are relatively high after the recent market crash. Therefore, investors who have a long-term horizon are likely to have sufficient time for a diverse range of companies held within their portfolio to overcome short-term volatility to post high capital returns.
They could also significantly outperform other mainstream assets and may enable you to retire earlier than you had planned.
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.