In the current stressed markets, the price of gold has been as volatile as many FTSE 100 shares and others.
The precious metal has a reputation as something of a safe haven in troubled times, but there are many things it can’t do. For example, it can’t pay you a dividend or expand its assets. It can’t grow its operations and build value.
FTSE 100 shares
All gold really can do is sit there while speculators buy and sell causing the price to rise and fall. I’d rather invest in shares, which can work out as an effective store of wealth and decent money compounding machines over the long term.
And there’s no better time to buy shares than when they are depressed, such as right now. If you choose carefully, you can pick up shares in some great companies at prices offering better value than before markets crashed.
But it’s important to make sure you know what kind of beast you’re dealing with. Big-name companies are backed by differing underlying businesses, each with their own unique set of characteristics.
However, I’d separate FTSE 100 shares into two piles, to begin with. Firstly, shares backed by cyclical businesses that have revenue and profits that tend to rise and fall along with wider economic conditions. And my second pile would consist of shares with more defensive underlying businesses.
You can often recognise a defensive outfit because of its consistent record of trading. Revenue, earnings and cash inflow tend to be broadly steady year after year. And the best ones will show regular annual rises in those figures. Such firms tend to occupy a well-defended niche in the market and often supply goods and services that tend to be in demand whatever the general economic weather.
What to look out for
The healthcare sector contains many defensive FTSE 100 shares, such as AstraZeneca, GlaxoSmithKline and others. And they turn up in the utilities and energy sectors with names such as National Grid and SSE. Another fertile sector for defensive firms is the fast-moving consumer goods arena. For example, companies selling ‘essentials’ such as Unilever and Reckitt Benckiser. And there are other sectors with defensive companies too.
Meanwhile, you’ll find cyclical firms in the banking, housebuilding, retailing, travel, hospitality and other sectors. Well-known cyclical names include the likes of Lloyds, Barclays, Persimmon, Taylor Wimpey, Next, Burberry, easyJet, Carnival, Whitbread and Compass.
I’ve listed more examples of cyclical companies than defensive ones. That’s because more businesses seem to veer towards the cyclical end of the scale than they do the defensive end. Indeed, those truly defensive operations are keenly sought by investors and rarely sell cheaply on the stock market. So, the opportunity now with defensives is to pick up some of their shares on cheaper valuations than before the recent market plunge.
But there’s an opportunity with cyclical stocks as well. Picking up a decent distressed cyclical stock can place you well to benefit from the next upleg as economies and markets recover. Either approach to buying FTSE 100 shares now could help you retire early!