Considering the mixed outlook for the stock market and global economy, many investors might be more comfortable buying gold over stocks. However, I believe this could be the wrong decision. Today, I’m going to explain why I reckon it may be worth buying the FTSE 250, rather than gold, for high returns over the long term.
The drawbacks of gold
Owning gold might look attractive in a crisis, but the yellow metal has some significant drawbacks. For example, it doesn’t produce any income and usually costs money to store. This means investors are dependent upon the precious metal increasing in price to make a return.
Also, gold is generally traded in dollars. As such, UK investors not only have to deal with the costs associated with owning gold, but also with foreign exchange costs. Fluctuating exchange rates can also erode profits earned on the yellow metal.
On the other hand, FTSE 250 stocks do produce income. Many companies offer a steady stream of dividend income. These businesses also earn profits in dollars, but their income streams are well-diversified. As such, investors are, to a significant degree, insulated from foreign exchange volatility.
What’s more, the FTSE 250 has produced significantly higher returns for investors over the past few decades than gold.
FTSE 250 profits
Over the past three decades, the FTSE 250 has produced an average annual return for investors of the region of 12%. That means every £1,000 invested in 1990 is worth £36,000 today, a total return of 3,500%. By comparison, from 1990 to 2020, the price of gold increased by around 360%.
These are only rough figures. The exact return achieved by investors will depend on different factors such as the length of time invested and invested. Still, I think they clearly illustrate why stocks have been a better investment than gold in the long run.
Time to diversify
That said, I think it would be unwise for investors to avoid the yellow metal entirely and devote 100% of their portfolio to FTSE 250 stocks. Every portfolio should contain some gold, to provide diversification and protection against market downturns.
Historically, investors have bought gold in uncertain times, pushing up the price of the precious metal when investors are usually selling stocks. This may be the best way to diversify a portfolio against uncertainty.
However, it’s unlikely gold alone will help you get rich and retire early. For that, a combination of stocks, as well as a small amount of gold, may be the best option. FTSE 250 stocks have proven they can produce outstanding returns over the long run. The best way to replicate this return could be to own a diversified basket of these stocks, or buy a tracker fund.
When owned as part of a diversified portfolio, I reckon these stocks have the potential to help you get rich and retire early. Now could be the time to adopt this approach while UK shares continue to trade at depressed levels following this year’s stock market crash.
