Buying assets that have recently risen in price is a common practice among investors. After all, they have momentum that could continue over the short run to produce high returns.
However, in the case of gold and Bitcoin, both assets may fail to produce continued price rises following their gains in 2019. As such, now could be the right time to invest £10k, or any other amount, in undervalued shares that have growth potential to improve your long-term financial situation.
Stock market potential
While the FTSE 100 may have gained 12% in 2019, it continues to trade at a price level that suggests it offers good value for money. For example, it has a dividend yield of 4.4% and trades less than 10% higher than it did over 20 years ago. Furthermore, many of its major sectors such as banking, financial services, resources and retail contain a range of companies that offer low valuations compared to their historic averages.
Why is this the case? The reasons for their low valuations include ongoing political risk in the US and Europe, as well as the potential threat of disruption to the global economy due to the spread of the coronavirus (just the kind of factors that have been pushing up the gold and Bitcoin prices). These risks could continue to hold back investor sentiment in the near term. But in the long run, the track record of the world economy’s growth performance and the stock market’s past recoveries from previous downturns, suggest that capital returns could be impressive for investors.
Buying shares while they trade on low valuations could prove to be a sound long-term growth strategy. With many large-cap shares currently offering improving financial forecasts over the medium term, their valuations could include wide margins of safety.
A superior risk/reward opportunity
While assessing the valuations of shares is a relatively straightforward process, the same really cannot be said for gold and Bitcoin. Bitcoin’s price, for example, is determined by investor sentiment and nothing else. Investors have no fundamentals available that can determine the underlying value of such virtual currencies, which means they could be trading at exceptionally low, or exceptionally high, prices at the present time.
Similarly, gold’s price is very dependent on investor sentiment. Although it has some real-world use in jewellery and other applications, of course, much of its recent rise has been due to investor caution regarding the world’s economic prospects and a lower US interest rate. Both of these factors may not persist over the long run, and could mean that gold’s price rise comes to an end.
Therefore, on a risk/reward basis, FTSE 100 shares could be more attractive than gold or Bitcoin. Their low valuations and the track record of the index in recovering from its previous downturns suggest that now could be the right time to avoid physical gold and Bitcoin, and instead buy a range of large-cap shares for the long term.