The recent stock market rally highlights how quickly UK shares can rise when investor sentiment improves. For example, the FTSE 250 is up over 20% since the start of November.
There are a number of risks that continue to face the world economy. But the long-term prospects for many industries are likely to improve as disruption reduces in response to vaccine deployment.
Therefore, now may be the right time to buy UK stocks while their valuations are low in some cases. They could produce higher returns than defensive assets such as gold in the coming years.
A long-term stock market rally
Even though many UK shares have risen in price in the recent stock market rally, a number of sectors continue to contain companies trading well below their long-term average valuations. This suggests there are still opportunities to buy undervalued shares in high-quality companies for the long term.
As the economy recovers, they could gain in price as their financial performances improve and investors become more positive about their prospects.
The likelihood of a long-term stock market rise seems to be high. The FTSE 350 has always not only recovered from its downturns, it’s also always gone on to post new record highs. Therefore, buying shares now while there seems to be further scope for capital growth could be a shrewd move.
Doubling an investment in UK shares
A long-term stock market rally could provide the right conditions for an investment in UK shares to double in value. Even if the stock market only matches its past returns, it could take only eight or nine years to double in value, since the FTSE 250 has posted annual total returns of around 9% in the last 20 years.
Of course, an investor could outperform the stock market’s historic returns, as well as its future returns, by purchasing high-quality companies at low prices. Historically, they have provided the greatest recovery potential after a market downturn, since investors may have been overly cautious in assessing their capacity to make gains as the world economy recovers.
While gold has enjoyed a strong performance since the start of the coronavirus pandemic, its long-term prospects may be less impressive. Certainly, low interest rates are likely to aid its performance. However, a large part of its appeal until now has been its defensive characteristics. Since investors are likely to become more upbeat and less risk averse in the coming years during a stock market rally, a portfolio of stocks could be a better means of doubling an initial investment.
As such, now could be the right time to pivot from gold to shares. Although volatility may be higher in equity markets compared to precious metals prices, the potential rewards on offer could be significantly greater on a long-term basis.
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.