The price of gold has risen around 460% over the past two decades. But it could go anywhere from here.
I reckon gold’s strong performance reflects the economic uncertainty we’ve seen over the period. The price tends to increase when investors pile in to use it as a safe haven when stocks and bonds are declining.
But apart from the hope that the metal will at least retain its value and even rise, there’s not much to praise about the idea of holding an investment directly linked to gold. For example, it won’t pay a dividend or do anything to generate more value.
Avoiding speculative shares
I reckon shares are much more attractive because each is backed by a company and its business. And businesses can grow, leading to bigger profits and potentially greater returns to shareholders, either via the dividend or in capital growth because of rising share prices.
So, in my quest to turn £25k into a cool £1m, I’d avoid investing in gold altogether. And I’d also steer clear of speculative stocks. You can usually recognise those because they tend to have a great and enticing story but it’s almost always all about what they are going to do and not what they have already achieved. Look closely and many have zero profits. In many cases, they have barely any revenues either.
Many speculative shares don’t pay a dividend and are likely to plummet, wiping out your investment in the process. It may appear that high-risk and potentially high-return speculative stocks are your best shot at making a million in the stock market but the opposite has been proven in many studies.
The stocks that tend to deliver the best shareholder returns are those backed with good-quality businesses when the share price is at a level offering decent value.
Quality first
It may seem counter-intuitive, but as a group, the stocks with the greatest potential for shareholders are also those that tend to be the safest. And I’d invest my £25k in mid- to large-cap shares that are displaying robust quality and value indicators. So, I’d look for decent profit margins and a record of stable and rising revenue, earnings, and cash inflow.
If the financial and trading record is good, there’s a decent chance the company operates in a strong trading niche. When I’ve found a good one, I’d look for a solid and rising stream of dividends and a valuation that makes sense.
But if you haven’t the time or inclination to research individual companies, I reckon index tracker funds make a great alternative. You could pick a tracker that follows an index of mature and established firms, such as the FTSE 100, FTSE 250, or the U.S. S&P 500, for example.