With the stock market having experienced a significant fall since the start of the year, many investors may feel that now is the wrong time to buy shares. After all, further declines in equity prices could be ahead in the near term as the fallout from the spread of coronavirus continues.
Furthermore, some investors may feel that buying alternative assets such as Bitcoin is a good idea. Here’s why that may not be the case, and why purchasing undervalued stocks for the long term could be a better means of making a million.
Bitcoin risks
The price of Bitcoin may have surged 140% higher in the past year, but the virtual currency continues to offer a highly uncertain future. Notably, its lack of fundamentals means that potential investors have no way of knowing whether it offers good value for money. This may lead to investors paying a relatively high, or low, price for the asset since they are dependent solely on investor sentiment to make a profit.
In addition, the long-term prospects for Bitcoin seem to be highly challenging. Regulatory change could mean that policymakers adopt a tough stance on the development of cryptocurrencies, while other virtual currencies could gain favour among investors and lead to a reduction in demand for Bitcoin. These risks could threaten its capital return prospects and lead to disappointing levels of profit for investors in Bitcoin.
Stock market potential
While the stock market’s performance in recent weeks has been disappointing, its long-term potential continues to be high. The track records of indices such as the FTSE 100 and S&P 500 show that they have always recovered from their challenging periods to post new record highs. In doing so, they have recorded annualised returns that are in the high-single digits.
Therefore, now may be the right time to buy a wide range of shares while they trade on low valuations. Certainly, they may take a number of months or even years to fully recover from their recent setback. But buying them while they trade on relatively low valuations and offer wide margins of safety has proven to be a worthwhile strategy to maximise your investment returns. Adopting this plan now could be a logical move for long-term investors.
Risk management
While Bitcoin is a risky asset to hold, shares can also be highly volatile. Therefore, managing your risk when investing in the stock market is a shrewd move to take.
Diversification is a simple means of reducing your overall risk. For example, buying a range of companies which operate in different sectors and varied geographies can reduce your exposure to specific risks. Furthermore, buying stocks in multiple industries could enhance your returns due to their exposure to a range of growth opportunities.
Therefore, while making a million from the stock market may seem unlikely following its recent performance, buying a range of undervalued shares could offer promising long-term returns that boost your chances of making a million.