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£5k to invest in an ISA? I’d forget gold and buy cheap FTSE 100 stocks to retire early

Gold’s recent price rise may make it seem more attractive to investors who would otherwise buy a selection of FTSE 100 shares in an ISA. However, gold’s appeal could wane as the world economy’s growth rate improves, while cheap large-cap shares may become increasingly popular as their financial performances return to positive gains.

As such, now could be the right time to buy a diverse range of stocks, rather than gold, in an ISA. Investing £5k, or any other amount, today could help to bring your retirement date a step closer.

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Golden appeal

The appeal of buying gold instead of FTSE 100 shares is largely based on its defensive characteristics. The precious metal has been a store of wealth over many years, and has often performed well during periods of economic turbulence.

Faced with the potential of a second market crash over the coming months, gold’s price could continue to push higher. However, over the long run, demand for the precious metal could moderate as investor sentiment improves. Investors may favour riskier assets, such as equities, as the world economy recovers.

Therefore, investors buying gold today may fail to experience the same pace of growth that has seen the precious metal rise to multi-year highs in 2020.

FTSE 100 potential

The FTSE 100’s market crash means many of its members currently trade on low valuations. Certainly, they face challenging operating conditions in many cases. However, buying those businesses that have strong balance sheets and are therefore likely to survive a period of weak economic growth could be a shrewd move. They may be able to take part in a likely economic recovery. They may even be able to improve upon their market position as competitors struggle to survive.

Clearly, risks facing the world economy mean that diversifying across a wide range of stocks and sectors is a shrewd move. Doing so will reduce your company-specific risk, and may provide higher long-term returns.

Alongside this, purchasing companies that have solid track records of adapting to changing consumer trends could be advantageous. The ongoing lockdown may disrupt some FTSE 100 industries. But those firms with flexible business models could potentially offer them greatest scope to thrive in a fast-paced economy that may change quickly.

Retirement prospects

Buying FTSE 100 shares to retire early has been a successful strategy over many years. The index’s 8% annual return since its inception in 1984 shows it can produce surprisingly large nest eggs over the long run.

For example, investing £5k today for a period of 30 years at an annualised return of 8% would produce a nest egg valued at £50,000. That amount on its own may be insufficient to provide a passive income in retirement. But the example shows that buying high-quality large-cap shares and holding them for the long run can improve your financial position and increase your chances of retiring early.

A Top Share with Enormous Growth Potential

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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.