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In recent weeks, gold prices have rallied sharply. The increase in demand for safe-haven assets amid the breakout of the conflict in the Middle East has caused the rise.
In light of the geopolitical and market uncertainty, would I be wise to turn my back on cheap UK shares in favour of investing in assets such as gold? Let’s take a closer look.
The place for gold in a diversified portfolio
Investors traditionally consider gold as a safe-haven asset. This is particularly evident during times of economic uncertainty, geopolitical instability, or market volatility.
During such times, investors often flock to gold as a store of value when other assets (including stocks) may be depreciating.
In addition, gold has historically acted as a hedge against inflation. During times of high inflation, the value of paper currency usually decreases, but gold tends to retain its value. This makes it an attractive option for investors looking to preserve purchasing power.
With all of that in mind, I think there could definitely be a place for gold as part of a well-diversified investment portfolio. But when it comes to long-term wealth building, I remain convinced that buying undervalued UK shares represents a superior strategy.
Focusing on cheap UK shares as a long-term strategy
Investing in stocks offers the dual prospect of steady income as well as capital appreciation. For instance, unlike gold, many British stocks offer the potential for regular income by way of dividends. And that’s why the majority of my portfolio would continue to be allocated towards UK shares.
Reinvesting these dividends over time would enable me to harness the power of compound interest. This is the process that can exponentially grow a small initial investment into a huge amount in the long run.
Within the FTSE 100 there are well-established companies with a history of stable earnings and regular shareholder payouts. What’s more, a handful of them look dirt-cheap in my eyes.
For example, UK-based financial services provider Legal & General is currently trading with a price-to-earnings ratio of 5.4. This suggests to me that the market could be seriously undervaluing its shares.
However, it’s important for me to note that targeting cheap stocks comes with its own set of risks. After all, market sentiment and economic factors can change swiftly, potentially affecting both share prices and dividend payments unexpectedly. To illustrate, during the coronavirus pandemic, a number of companies were forced to suspend shareholder payouts amid the financial pressure.
The final verdict
That said, over the long term, the stock market has exhibited consistent growth. Moreover, history tells us that despite the short-term volatility, markets tend to recover and appreciate over extended periods, providing substantial returns on investments.
All things considered then, while gold undeniably has its merits, the potential for long-term capital appreciation and income generation that comes from UK shares explains why I’d focus primarily on investing in stocks in my pursuit to build substantial wealth over time.
