After plunging for almost five years between 2011 and 2015, the price of gold in US dollars is now back near the high it set around nine years ago. Imagine you’d decided to invest in gold for the first time in the summer of 2011 right at the peak. You’d now be approaching breakeven in terms of price. But the long wait means that inflation will have eroded the spending power of your invested money. So you’d still be sitting on a losing investment instead of being on your way to making a million.
How shares can make you a million
And there will have been no shareholder dividends or interest payments to sweeten the deal along the way. Gold doesn’t do anything to build wealth for you in the same way that shares can. Gold just sits there and the price goes up or down.
But there is an argument that gold should be part of an investment portfolio because its price tends to increase when events cause shares to decline. And in fairness, since bottoming around 21 years ago, gold is up more than 600% at today’s price near $1,800/oz.
If you’d been investing in gold as a safe-haven for all those years, you’d have done well. But studies have shown a big driver of the price movements for gold is investor speculation. And speculation can reverse the price action too.
Overall, I’m not keen on investing in vehicles that track the price of gold. And well-known investor Warren Buffett, for example, has done very well without touching gold. Instead, he’s made many, many millions by investing in businesses and the shares of companies listed on the stock market.
I’d diversify across shares and not asset classes
So, with £20k to invest, I’d plan to diversify the money across different shares and share-backed investments. And I wouldn’t worry too much about diversifying across different classes of asset. However, everyone will favour their own unique approach to diversification.
But to me, there’s little point in taking a risk with gold when shares can do so much to help build wealth for investors. Other studies have shown, for example, that the price movements of gold don’t work very well as a hedge against inflation. Indeed, because of speculation, the price movements of gold can end up looking random.
But shares are backed by businesses that can build their value. And many businesses can behave like a hedge against inflation because of their ability to raise selling prices. By buying shares of companies with solid underlying businesses, we can own assets that have a good chance of appreciating over time.
However, I reckon a long-term investment strategy works best when we target shares with good-quality underlying businesses. Those, for example, operating in a strong niche in the market with strong and consistent incoming cash flow. It’s important to be discerning about the stocks you choose if you are aiming to compound your way to a million-pound portfolio over time. Alternatively, you can diversify away some of the risks by going for managed and tracker funds.