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Have £5k to invest in UK shares? I’d avoid gold and Cash ISAs to buy bargain FTSE 100 stocks

Investors considering buying gold or using Cash ISAs at the present time may enjoy higher returns than the FTSE 100 in the short run. The popularity of lower-risk assets could increase due to the challenging economic outlook, which could cause large-cap shares to experience a period of weak performance.

However, £5k, or any other amount, invested in FTSE 100 shares over the long run could deliver significantly greater returns than other mainstream assets. The index’s low valuations and growth prospects in the coming years may mean that now is the right time to build a diverse portfolio of bargain shares.

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Bargain FTSE 100 shares

The FTSE 100 contains a number of companies that trade significantly below their long-term average prices. This may dissuade some investors from buying them, since they could yet fall further as the economic cost of coronavirus becomes more evident. However, over the long run they have the potential to post high returns that could catalyse your portfolio’s performance and improve your financial prospects.

In many cases, investors have priced-in the risks facing blue-chip shares. Therefore, they appear to offer margins of safety in case the economic cost of coronavirus proves to be even greater than anticipated. And, with monetary policy likely to remain supportive of the economy over the coming years, the operating conditions for many businesses could improve as they have done after previous recessions.

Furthermore, buying FTSE 100 shares while they are priced at low levels has previously been a worthwhile strategy. For example, investing during the global financial crisis, the tech bubble and the 1987 crash allowed investors to capitalise on the index’s future recovery prospects.

Short-term risks

Of course, buying FTSE 100 shares today could lead to paper losses in the short run. Therefore, gold and Cash ISAs may offer greater stability and profit in the near term.

However, low interest rates mean that the returns net of inflation for Cash ISAs could be highly disappointing. In fact, they could even be negative and lead to a reduction in spending power.

Similarly, gold’s appeal may decline as an economic recovery takes hold and investor sentiment improves. The precious metal is also trading at a high level, which could suggest that there is limited scope for similar price rises to those experienced since the start of 2020.

As such, the FTSE 100 could offer stronger return prospects over the long run than gold and Cash ISAs. Now could be the right time to build a diverse portfolio of high-quality businesses while their share prices are trading at bargain levels. History suggests that the current low levels of the index will not last in perpetuity, which could mean there are attractive capital returns on offer for long-term investors who can look beyond short-term market volatility.

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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.