The price of gold and Bitcoin have both moved higher since the start of the year. But I wouldn’t chase either speculative vehicle up because I think there’s a golden opportunity unfolding in shares and share-backed investments.
The trouble with speculative markets such as Bitcoin and gold is that they can reverse as swiftly as they shoot up. But with shares you can build wealth and compound your investment because of dividends.
The great thing about shares is that they are backed by a business that can generate value by increasing their cash flows and assets. And as a shareholder, you can receive a little slice of that value back in the form of the shareholder dividend.
Compound and prosper!
If you plough your dividends back into your share investments, you’ll be on the road to compounding your money and building real wealth. And you can do it with your capital as well when you sell a share by immediately reinvesting the money into another one.
It could be a great time right now to involve yourself in the stock market. The great financial crisis of 2007/08 plunged the financial markets, economies and businesses into a hole that has taken a lot of digging to get out of. But we could be almost free and ready to move into a new period of sustained prosperity. Under conditions like that, I can only see shares doing well, in general.
And that’s what has happened historically. If you look back, the stock markets of the world, such as London and New York, have performed magnificently over the decades. The FTSE 100, for example is up almost 650% since it started in January 1985 and the American markets, such as the S&P 500 index, have done even better.
Such gains are substantial in themselves, but when you add in the compounded gains you could have achieved by reinvesting all the dividends along the way, the historical performance is outstanding. I think we’ll see such gains again in the years and decades to come, so wouldn’t look twice at markets such as gold and Bitcoin, which don’t even pay dividends.
How to get involved
It’s easy to participate. Just buying the market is a good idea, and I’d achieve that by making regular payments into an index tracker fund, such as one that follows the FTSE 100, FTSE250 or S&P 500. You’ll get instant diversification across many underlying shares with vehicles such as those. And if you select the accumulation version of each fund, rather than the income version, your shareholder dividends will automatically be reinvested for you – and you’ll be compounding your investment.
That would be a good start. But to realistically grow £20k into a million, you’ll need to achieve stock market outperformance. And one way of doing that is to invest in the shares of carefully selected individual companies. But if you do that, I recommend learning as much as you can about investing strategy. I’d start by hanging around the Motley Fool UK website.