A stock market rally may be on the horizon. But it seems most investors are too focused on short-term volatility at the moment. As such, assets like gold have started gaining a lot of popularity of late.
Seeing gold retake the spotlight this year isn’t exactly surprising. The commodity has long been used as a safe haven during times of economic uncertainty and is a proven inflation hedge. Yet, despite popular belief, it pales in comparison to simply holding on to high-quality UK shares.
UK shares versus gold
Over the last 10 years, the price of gold has remained relatively flat, until recently. As such, the average annualised return for the commodity is a mediocre 3.5%. By comparison, the FTSE 250 has delivered returns closer to 7.6% each year. And that’s even after the 2020 Covid crash and the ongoing stock market correction.
While that may seem like a small difference, the impact on compounding is immense. To demonstrate, let’s say I have two £10,000 portfolios. One holds gold, the other a low-cost FTSE 250 index fund. With no additional contributions or withdrawals, the gold portfolio after 10 years would be worth £14,183. Meanwhile, the portfolio holding FTSE 250 stocks is closer to £21,331 – that’s over 50% higher!
While the returns of gold may seem bleak by comparison, there is one notable advantage. The price of the metal is far less volatile than stocks. And lower returns may be perfectly acceptable to some individuals looking to protect their wealth rather than grow it.
Personally, I’m more interested in returns for my portfolio. And with a stock market rally potentially coming soon, UK shares could be primed to deliver some explosive performances.
When the rally will begin is anyone’s best guess. It may have already started, or could be months away. But I can confidently say it will eventually materialise. After all, the stock market has a perfect track record of recovery even after the most disastrous of crashes, as we saw in 2008.
Preparing for the stock market rally
Not every business is going to survive this storm. With inflation on the rise, consumer spending is restricting both economic and corporate growth. Meanwhile, the Bank of England’s interest hikes to combat inflation are making external capital significantly more expensive to raise.
What does this all mean? Well, it’s not good news if a company has tight profit margins, subpar cash flows, and a heavy debt burden. And, sadly, a lot of businesses that were disrupted by the pandemic fall into this category.
The hospitality, travel, and consumer discretionary sectors are likely to endure more tough times ahead, even with Covid-19 in the rear-view mirror. Cineworld is just one of the undoubtedly many future casualties.
Therefore, when looking for the best UK shares to buy to profit from the eventual stock market rally, it’s essential to realise that not every beaten-down stock will make a comeback. That’s why I’m specifically looking for businesses capable of absorbing additional operational costs, whether through margins, or by using a war chest of liquidity.