The likelihood of a second stock market crash continues to be relatively high. Risks, such as a second wave of coronavirus, as well as political uncertainty surrounding Brexit, could weigh on investor sentiment over the coming months.
Should a downturn occur, many investors may decide that less risky assets, such as gold, are more attractive than UK shares.
However, over the long run, the returns on offer from bargain stocks in the FTSE 100 and FTSE 250 could significantly outperform the gold price. As such, buying them, rather than gold, could prove to be a shrewd move.
A second stock market crash
Only time will tell whether indexes such as the FTSE 100 and FTSE 250 experience a second market crash. Risks to the economic outlook remain in place, and could negatively impact on the financial performances of a wide range of businesses. In turn, investors may become increasingly bearish, which could send UK shares lower.
In such a scenario, buying gold and other less risky assets may seem to be a sound move. The precious metal has a long history as a defensive asset that’s generally performed well in periods of economic weakness.
However, bargain UK shares could offer a better long-term return outlook than gold after a second market crash as a result of the precious metal’s high price. It’s breached its record high this year, which suggests there may be more limited scope for capital growth than there has been in recent years. And, with investor sentiment likely to improve over the long run as fiscal and monetary policy stimulus take effect, buyers of FTSE 100 and FTSE 250 shares could benefit from a sustained recovery.
Preparing for a slump
Of course, there’s doubt as to whether a second market crash will occur. As such, investors who are able to unearth high-quality businesses trading at low prices may wish to invest today. Their prices may factor in the potential for a further decline in the stock market. This could mean they currently include a wide margin of safety.
If there’s a downturn in UK share prices, investors may wish to remind themselves of the track record of indexes such as the FTSE 100 and FTSE 250. Yes, they have experienced major recessions and bear markets over recent decades. But they have always recovered and posted annualised total returns in the high-single-digits.
By investing while share prices are cheap, such as after a market crash, you may be able to obtain an even higher return over the long run that’s significantly ahead of other assets such as gold. Volatility may be high among UK shares. But their past performance suggests that they’re more than likely to offer the best returns available for investors who can look beyond short-term uncertainty.
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.