Buying gold is becoming increasingly popular in 2022 compared to investing in cheap shares. With rising inflation and interest rates, along with an ongoing energy crisis, stocks haven’t exactly been stellar performers lately.
Yet as horrendous as it is to watch my portfolio suffer, these problems are ultimately short-term speed bumps. As a long-term investor, I’m not interested in what will happen in the next couple of months. I’m focused on the next decade.
With most investors seemingly in full panic-selling mode, plenty of fantastic businesses are becoming exceptionally undervalued, in my opinion. And as history has shown countless times, buying and holding high-quality dirt-cheap shares is one of the best wealth-building investment strategies.
Gold versus cheap shares
Recently, the price of gold has been on the rise. And compared to the performance of the stock market, the commodity seems to be thrashing equity investors.
That’s not surprising since, during economic turmoil, gold has been used as a store of value to protect wealth and hedge against inflation for centuries. But when the economy is flourishing, the metal fails to deliver any meaningful returns compared to the stock market.
Since the peak of the 2008 financial crisis, the price of gold has appreciated by 72% over 14 years. That’s the same as a 3.9% annualised return, slightly ahead of inflation at the time. By comparison, the FTSE 250 index has delivered returns of 231%, or 8.9% annually, over the same period.
These figures go to show that gold works as a means of protecting wealth. But for growing capital and building a nest egg, that’s where buying cheap shares for the long-term steals the show.
Timing the market is a loser’s game
What if I sold my stocks today, bought some gold, and then repurchased my shares at a better price once the stock market stops throwing a hissy fit? In theory, this sounds sensible. In reality, it’s often a mistake.
The problem with deploying this investment strategy is that it requires me to accurately predict when the stock market will begin recovering. That’s far easier said than done. And it’s worth pointing out that in every previous crash or correction, the bottom has always hit when investor sentiment indicated things would only get worse.
In other words, trying to time the market is near impossible. And even professional investors and traders get it wrong constantly.
That’s why holding onto my shares during volatile periods, as unpleasant as it can be, is often the best move. But I can also capitalise on the situation. Despite popular belief, stock market corrections and crashes aren’t all that common, and neither is the buying opportunities they create.
In a panic, even the best stocks with robust balance sheets, proven business models, and talented leadership can end up being sold off. If I can successfully identify these bargains, I’ll be able to maximise my returns once the stock market recovery begins.