Gold’s price rise to a record high this year may tempt some investors away from crashing UK shares. After all, their short-term prospects are uncertain, while gold could remain in favour in a period of low interest rates.
However, over the long run, the recovery potential of cheap British stocks means they could be a more profitable investment. They could boost your long-term financial outlook and improve your prospects of retiring early.
The rising gold price
While a rising gold price may make the precious metal seem more attractive than UK shares, it could limit its future returns. In other words, buying an asset while it’s trading close to a record high may mean there’s less scope for capital growth. Investors may have factored in a positive outlook for gold that means it’s unable to deliver continued growth at the same pace as it has done since the start of the year.
By contrast, cheap British stocks could have significant capital growth potential. In many cases, they trade at prices significantly lower than their historic averages. For those businesses that have the financial strength to survive a weak economic period, there could be substantial scope for a long-term recovery.
Buying them now while investors aren’t pricing in their turnarounds could lead to impressive returns in the coming years.
Identifying the best UK shares
Of course, not all cheap UK shares offer good value for money. Some stocks deserve their low prices. This is due to major risks such as weak financial positions and business models that may be unable to adapt to a changing market outlook.
However, many cheap shares are undervalued as a result of weak investor sentiment towards the wider stock market. Investors have flocked to defensive assets, such as gold, to avoid short-term risks.
This means there are a greater number of buying opportunities for investors who can cope with short-term uncertainties. And, in return, there’s the prospect of impressive gains in the long run. In many cases, high-quality businesses with solid market positions are trading at low prices simply because of investor apathy towards risky assets.
Clearly, UK shares may yet experience a second market crash in 2020. Risks, such as Brexit and coronavirus, are ongoing and may mean that the price of gold moves even higher in the coming months.
However, investors who are seeking to obtain a retirement portfolio are likely to achieve greater success through building a portfolio of cheap shares today. More so than purchasing gold.
They may face uncertain near-term futures, but many stocks are undervalued at the present time and could therefore deliver high returns. Over time, they can improve your financial prospects and increase your chances of retiring early.
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.