The FTSE 100 has made strong gains since its 2020 lows. But gold and Bitcoin have produced stronger performances. For example, Bitcoin has doubled from its March 2020 level, while gold has moved ever-closer to a new all-time high.
Despite this, the investment appeal of large-cap shares appears to be high relative to the precious metal and compared to virtual currencies. As such, buying FTSE 100 shares with £5k today could make you a fortune over the long term.
FTSE 100 prospects
The FTSE 100’s performance suggests that investor sentiment has improved significantly in recent weeks. The index has surged over 25% higher since dropping below 5,000 points in March.
However, many of its members continue to trade significantly below the prices at which they started the year. In some cases they have valuations that offer a substantial discount versus their long-term averages. This suggests that there are still buying opportunities. You see, many large-cap shares may remain undervalued, even after their recent rebounds.
As such, it is possible for investors to buy high-quality businesses when they trade at low prices. This could enable them to earn a market-beating return over the coming years because they can position their portfolios effectively ahead of a likely recovery. The FTSE 100 has produced an annualised total return in excess of 8% since its inception in 1984. So outperforming the index may produce a surprisingly large portfolio valuation over the long run.
Of course, some FTSE 100 sectors may face challenging outlooks that negatively impact on their share price performances. Due to the economy’s future prospects being highly uncertain at the present time, it could be a sound move to diversify your portfolio across a wide range of industries. That way, you can limit your exposure to industries that may take some time to recover, or that fail to be as popular with consumers over the coming years as they have been in the past.
Furthermore, investing in companies with solid financial positions and access to liquidity during an uncertain period for the economy could be a prudent strategy. It may help you to avoid those businesses that struggle to survive in what may prove to be a fast-changing economy as coronavirus restrictions are lifted.
Bitcoin and gold
Bitcoin and gold may continue to be more popular than FTSE 100 shares in the short run, and this may be reflected in their outperformance of the index. However, the low valuations available across the index, as well as the potential to manage risk, mean that building a portfolio of large-cap shares could be a more profitable move. It may lead to strong growth for your portfolio, as well as manageable risks, which all increases your chances of making a fortune in the long run.
The post Forget gold and Bitcoin. I think £5k invested in cheap FTSE 100 stocks can make you a fortune appeared first on The Motley Fool UK.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 2020