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Gold has been popular with many investors over the past few years. And it is often seen as a store of wealth for troubled times. But with a price close to $1,700 an ounce, its performance has been uneven. And it’s not the vehicle I would choose to aim for the million.
Over six months, the metal is down just over 13%. And over the past year, it’s just over 3% less. But it has increased by 32% in five years.
However, gold investors with a longer time horizon fared better. In two decades, the price of shiny items has increased by 435%.
A development opportunity in action
But historically, the price of gold has struggled to rise when interest rates are on the rise. So, I forget about gold after its long rise and focus on stocks and shares.
Gold could rise in the months and years to come. But I think my best chance of realizing significant long-term gains from a £25,000 investment is to pick stocks carefully.
The stock market has been volatile since the pandemic hit. And the war in Ukraine caused more difficulties which added to the problems. But valuations have fallen for many companies. And this situation has led to what looks like a decent opportunity to buy cheap stocks.
My plan would be to hunt good companies now with the goal of holding onto their stock for the long term. I would look for businesses that have the potential to increase revenue in the years to come. And I would aim to buy now when their valuations are depressed. However, there is no guarantee of a long-term positive outcome with any business. They can all experience operational difficulties from time to time.
Still, Terry Sandven, chief equity strategist at US Bank Wealth Management, had some words of encouragement for investors recently. He said history shows that those with long-term horizons tend to experience favorable returns. And that’s because year-to-year swings in returns, positive and negative, “to smooth out the longer period”. And he added that the effect “applies to both active and passive investment styles”.
Meanwhile, super-investor and billionaire Warren Buffett offers us a good example of what Sandven is talking about. Each year in its letter to the shareholders of Berkshire HathawayBuffett highlights America’s compound annual gain S&P500 index. And it’s interesting because the index includes 500 major publicly traded companies in the United States. And it’s often considered one of the best indicators of the stock market as a whole.
According to Buffett, the compound annual gain of the S&P 500 between 1965 and 2021 was 10.5% with dividends included. And that suggests that even passive investing in index funds has the potential to generate significant returns over time. Although future positive results are never certain.
However, Buffett has done much better over this long period, generating a compound annual gain of just over 20% from his investments in Berkshire Hathaway.