The rising Bitcoin price may tempt some investors to buy into the virtual currency’s growth story. After all, it has gained over 170% in 2020. However, its high risks and the opportunities available across the FTSE 100 and FTSE 250 mean that buying equities could be a more profitable decision. In particular, following a strategy used by fund manager Terry Smith could yield high returns in the long run.
Using Terry Smith’s investing strategy in today’s stock market
Smith is very successful at what he does. His Fundsmith Equity Fund has delivered an 18% annualised return since its inception just over 10 years ago. In doing so, it’s outperformed a global index of stocks, which is up by around 12% over the same time period.
Smith’s strategy is fairly simple. It centres around selecting the best quality companies. These are businesses that have dominant market positions and have historically offered high returns on capital.
This approach isn’t dissimilar to that used successfully by billionaire investor Warren Buffett over the years. However, Terry Smith arguably places less emphasis on the purchase price of his holdings. Instead, he seems to be willing to pay premium prices for premium businesses.
In today’s stock market, there are numerous opportunities to follow Terry Smith’s strategy and purchase high-quality companies. Moreover, many businesses trade on lower valuations now versus their historic averages. Given that the world economy is forecast to post strong growth in 2021, there may be opportunities to make impressive gains as company outlooks improve in the coming years.
Avoiding Bitcoin even after its recent price rise
Although Bitcoin’s 170% rise this year beats Terry Smith’s returns, the virtual currency faces an uncertain outlook. Regulatory risks remain present despite investors in the cryptocurrency seemingly becoming more upbeat about its prospects. Similarly, there remain question marks regarding its utility. A limited size and a lack of infrastructure may mean it ultimately fails to replace traditional currencies.
However, perhaps the biggest risk facing Bitcoin investors is that it’s impossible to work out how much it may be worth. Its price is based solely on investor sentiment. Therefore, it could be subject to wild changes without clear reason.
Making a million
As a result, following Terry Smith’s strategy could be a better means of making a million. Even if an investor can only match the historic returns of a diverse portfolio of FTSE 100 shares of around 8%, investing £100,000 today could produce a portfolio valued at over a million within 30 years. Similarly, investing £750 per month at the same rate of return would lead to a £1m portfolio in the same time period.
However, by focusing capital on high-quality businesses, it may be possible to outperform the stock market and follow in Terry Smith’s footsteps over the coming years.