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The rising price of gold may lead some investors to sell FTSE 100 shares to buy the precious metal. However, the low valuations prevalent across the index after the stock market crash mean it could be a better means of making a million.
As such, now could be the right time to build a diverse portfolio of cheap shares. They could improve your long-term financial outlook.
While the FTSE 100 has regained some of its lost ground since the stock market crash, it continues to trade around 20% lower than it did at the start of the year. Therefore, a number of stocks could offer wide margins of safety that gradually narrow over the long run as the economic outlook improves.
Within the index, some stocks are trading at exceptionally cheap prices that are much lower than their historic averages. Investor sentiment towards sectors such as housebuilding, commodity-related businesses and consumer goods companies is relatively low at the present time. As such, some high-quality companies that face uncertain trading conditions in the short run may offer capital return potential over the long term.
Certainly, the FTSE 100 could experience a second stock market crash later this year. Risks such as Brexit and coronavirus look set to remain in place in the coming months. However, in many cases the valuations of large-cap shares factor in an uncertain future. This could mean that they deliver high returns in the long run.
Gold’s price rise
Clearly, gold’s recent price rise may attract some FTSE 100 investors at a time when the economic outlook is very uncertain. Gold’s status as a defensive asset means that it could deliver impressive returns in the short run. Especially if investor sentiment towards riskier assets such as shares remains weak.
However, its high price means that much of the economy’s challenging future may already have been accounted for by investors. This could mean that investors with a long time horizon can unearth greater reward opportunities in the stock market. That’s instead of buying a defensive asset while it is trading close to a record high.
Making a million
The FTSE 100 has a long track record of recovery after experiencing a market crash. In fact, it has produced annualised total returns of around 8% since its inception in 1984, despite numerous downturns taking place along the way.
Assuming the same rate of return on a £500 regular monthly investment, you could obtain a £1m portfolio within 35 years. However, by purchasing cheap shares now you could generate even higher returns that reduce the amount of time it takes to build a seven-figure portfolio.
As such, now could be the right time to build a portfolio of stocks for the long run.
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.