Gold and Bitcoin became increasingly popular in 2019. They recorded strong growth that may continue in the short run. As such, many investors may be thinking about adding them to their own portfolios.
However, they both could fail to offer a superior risk/reward opportunity compared to the stock market. With many FTSE 100 and FTSE 250 shares currently trading on low valuations and having improving growth prospects, they could be a better means of making a million.
Bitcoin may have more than doubled at its peak in 2019, but its risks continue to be high. Investors have no means of ascertaining whether its current price level represents good value for money, since the virtual currency’s price is dependent on sentiment rather than fundamentals. As such, they may be buying an asset which is grossly overpriced.
Furthermore, Bitcoin has a limited size, as well as competition from other cryptocurrencies, that could inhibit its potential to replace traditional currencies. Alongside its lack of infrastructure, this may mean that it fails to deliver on its long-term potential.
Although gold is a far less risky asset to hold than Bitcoin, its long-term return prospects could be limited. History has shown that buying shares during uncertain periods for the economy allows investors to capitalise on low valuations that can produce higher returns. Therefore, buying gold after its recent price rise, and while many shares appear to offer wide margins of safety, could be the wrong move for long-term investors to make.
Clearly, 2020 could prove to be a volatile year for the FTSE 100 and FTSE 250. Despite them relying on international markets for much of their income, they continue to be highly dependent on the UK. With Brexit risks set to continue to be high as the process of leaving the EU continues, it would be unsurprising for there to be periods of declining share prices ahead in the coming months.
This could prove to be a worthwhile buying opportunity for long-term investors. As mentioned, lower valuations can provide the chance to purchase high-quality businesses while they offer wide margins of safety. Through buying a diverse range of companies that have solid balance sheets, favourable growth outlooks and strong cash flow, it may be possible to position your portfolio for long-term capital appreciation.
As such, now could be the right time to focus your capital on the stock market, rather than on Bitcoin and gold. Certainly, the virtual currency and precious metal have been strong performers in 2019. But their risk/reward ratios may be less favourable compared to the stock market.
With the cost and ease of building a portfolio of companies having become more attractive in recent years, now could be the right time to pivot from gold and Bitcoin to a range of shares. It could improve your chances of making a million.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019