The price of gold has increased substantially this year. Investors have been buying the yellow metal as uncertainty about the state of the economy has grown.
In the past, gold has shown itself to be a good hedge against uncertainty. The price of the precious metal tends to increase when uncertainty rises, offsetting the decline in value of other assets.
However, while I do have some gold in my portfolio, I think it would be a mistake to only rely on this asset in the long run. I reckon I have a much higher chance of building a substantial financial nest egg using stocks and shares.
Gold is an interesting investment proposition. The asset does not provide any cash flow. What’s more, it usually costs money to store. This means the price of gold needs to increase by a certain percentage every year to cover costs. And as it does not produce any cash flow, it isn’t easy to place a value on the asset. It is only worth as much as other investors are willing to pay.
Despite these drawbacks, the gold price has increased steadily over the past few decades. But its returns have paled in comparison to some stocks and shares.
From 2000 to 2020, the price of gold increased by around 7.8% per annum. Over the same period, the FTSE 250 returned about 9%, although that has risen to 10% after the recent performance.
The small difference could make a significant impact in the long run. For example, it would take roughly 50 years to turn £20k into £1m at an annual rate of 7.8%. It would take just 40 years to hit this target at a 10% annual return rate.
Buying stocks and shares
That’s why I’ve been buying stocks and shares for my portfolio over gold. The kind of corporations I’ve been focusing on are high-quality growth stocks, as well as blue chips and passive index funds — companies like Future and Reckitt Benckiser.
I’m also avoiding businesses that may continue to struggle in the near term. This list includes IAG (although that’s not the only company I’m staying away from in the current environment).
I think the stocks I’ve been buying can outperform gold in the long run, based on past trends. My calculations also suggest that by investing in these businesses, I can turn an investment of £20k into £1m in the long run.
With small contributions along the way, I believe it’s possible to hit this target faster than the figures above detail. By adding an extra £200 a month, it could be possible to hit £1m in around 30 years by using stocks and shares.
So, that’s why I’m relying on stocks and shares to make a million. While gold has yielded large returns in the past, I think shares are the better buy for the long term.
Rupert Hargreaves 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.