The stock market crash has contributed to rising demand for gold. Increasingly risk-averse investors have pivoted from the uncertainties faced by UK shares in indexes such as the FTSE 100 and FTSE 250 to the defensive characteristics of gold.
While this strategy may have been profitable in recent months, over the long run a recovering stock market could offer higher returns than precious metals. As such, now could be the right time to sell gold and invest money in bargain British stocks that have turnaround potential.
A rising gold price
While the stock market crash has negatively impacted a wide range of share prices, the gold price has soared to a record high in 2020. This has at least partly been due to weak investor sentiment towards risky assets, as well as gold’s status as a store of wealth for investors. As such, it’s generally outperformed the stock market during periods of economic turbulence.
Although this trend may continue over the near term, the long-term prospects for gold could be less appealing. Ultimately, investors are likely to regain confidence in assets such as UK shares as the economic outlook improves. This could push the prices of British stocks higher, and lead to their outperformance of precious metals.
While this outcome may presently seem unlikely, the economy and stock market have fully recovered from every previous downturn they’ve experienced. The same future is likely to be ahead for them after what has been a rare set of circumstances for investors in 2020.
Buying cheap shares after the stock market crash
Clearly, buying cheap shares after the stock market crash may be a difficult process for any investor. Risks such as coronavirus and Brexit mean that the FTSE 100 and FTSE 250 may experience periods of high volatility in the coming months.
However, many undervalued British stocks appear to have the financial means to overcome their short-term risks. Following their survival, they have the market positions and competitive advantages required to return to high levels of profitability as trading conditions improve in a growing economy. This may produce sound recoveries in their stock prices. In turn, that will benefit those investors who purchased shares when they traded at a low ebb.
Since many British stocks are trading at historically low prices after the stock market crash, it is possible to build a diverse portfolio of companies. A larger portfolio can mean reduced risk, since you are less dependent on a small number of stocks for your returns.
While this may never lead to lower risks than those available through purchasing defensive assets such as gold, a portfolio of cheap stocks could outperform other mainstream assets in the long run. As such, for investors with a long time horizon, now could be the right time to start buying shares after the recent market decline.
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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.
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