The values of Bitcoin and gold have both been strong so far this year. And that could tempt some people into investing in those vehicles. But I reckon cheap UK shares are a better route to retiring rich.
Why cheap UK shares?
My concern is that gold and Bitcoin have both been riding high for a long time. And, to me, the risk of price reversals looks elevated. Investor speculation drives both markets more than underlying fundamentals. And sentiment can change at any time. I think Bitcoin and gold look risky right now.
Meanwhile, the coronavirus pandemic caused the stock market crash in the spring and many shares still trade below their pre-Covid-19 levels. In many cases, the damage the pandemic has caused to underlying businesses may prove to be short term. Indeed, some enterprises are adapting well to the new trading conditions. And many firms will likely stage a full recovery when we eventually see a vaccine for the disease.
So lower share prices now means shares could prove to be cheap. And that is particularly true if valuations have reduced as well. Meanwhile, one proven strategy for success in stocks is to buy shares of quality businesses when they are depressed. Often, lower share prices go hand in hand with stressed general economic conditions or a crisis as we are seeing with the pandemic.
And buying shares in quality companies at fair prices and holding them for the long term has been the bedrock of many investors’ investment strategies. I’m thinking of well-known investors such as Warren Buffett, Charlie Munger, Nick Train, Terry Smith, Keith Ashworth-Lord, and Mark Slater. Indeed, the strategy is a well-trodden and proven path to generating wealth and it can work well with cheap UK shares.
A powerful trend in your favour
But on top of the advantage you can gain by buying shares when the market is offering them on sale at lower prices, you’ll have a powerful trend behind you. That’s because, over the long term, the returns from shares in aggregate have outperformed all other major classes of assets. To me, shares are the place to be rather than investing in bonds, property, or cash savings accounts, for example.
I’d begin by setting up a Stocks and Shares ISA to hold my investments. The ISA will shelter your returns from tax and I think they represent an excellent opportunity for investors who are investing for the long haul. Secondly, I’d aim to transfer regular money into my ISA. For me, that means a direct transfer every month as soon as my wages arrive.
Within the ISA, you can take advantage of cheap UK shares in two ways. One is to buy the shares of selected individual companies. And another is to use collective vehicles such as managed or tracker share funds. And don’t forget the key to building wealth is to compound your returns. That means ploughing all your dividends and proceeds from share sales back into your investments. Helpfully, many share funds can do that for you automatically.