It’s true: gold outperformed the FTSE 100 in 2019. Fellow Fool Peter Stephens notes that during the year, gold returned 18%, while the FTSE 100 returned 16%.
Does this mean that gold could be a better investment going forward?
Gold is often seen as a safer investment than stocks and shares. It does not have a distinct correlation to other assets, such as real estate property, bonds, or shares. As such, it might have a place in an investor’s well-diversified portfolio.
However, with many of the UK’s top companies appearing to trade at a good valuation, I think investing in the FTSE 100 is the better option. Here are three reasons why.
Diversification
By investing in an FTSE 100 index tracker fund, investors have a degree of diversification built in. By buying a portion of the UK’s top 100 listed companies, investors have a stake in banking giants, oil companies, leisure businesses, and consumables among other industries.
In addition to diversification across industries, the FTSE 100 has a geographical spread too. Much of the revenue attributable to the index is made in dollars. This was clear after the Brexit referendum result when the pound lost value against the dollar, and the index rose by 10% just three months later.
Pound cost averaging
By regularly paying amounts into an index fund, investors can take advantage of pound cost averaging. A regular sum added to the fund will mean that investors are buying at low points as well as high, averaging out in the long term.
Compound interest
Investors of index funds can also benefit from compound interest: when interest earned on an investment compounds on itself. Interest on interest, from one year to the next.
This is what fascinated Warren Buffett, who realised the power that compound interest could have on his investments early on in his career. This is especially true if dividends are reinvested into the fund.
Low fees
Holding an index fund is easier than ever. Through a Stocks and Shares ISA, investors could pay fees lower than 0.1%, with a platform fee on top.
Investing through a Stocks and Shares ISA is also tax-efficient and uncomplicated. In the event of an emergency, it is good to know that the investment can be easily sold off, whereas with gold the process might be more cumbersome.
The future
Gold has had a great run of late, but that could be because of the defensive nature of the investment. Geopolitical issues – such as Brexit, the US-China trade war, and tensions between the US and Iran – have weighed heavily on equities. I believe that in the long run, if confidence is restored in the market, those buying into FTSE 100 funds could be in with a good chance of making a nice profit.