It's tough to beat gold, isn't it? There's no better medal to win in the Olympics. For many people, there's no better component of jewelry. And when it comes to investing, quite a few folks think that other investments just aren't as safe or lucrative.
Well, that's just wrong. You might think of gold as safe-ish because it's a tangible item that exists in limited quantities, and because piles of gold bars in a vault somewhere won't be worth nothing anytime soon. Think again.
Stocks are tied to tangible things, too: actual bricks-and-mortar companies. Merck (NYSE: MRK) stock is tied to Merck buildings and Merck employees and lots of research and formulations of medications and patents.
Chevron (NYSE: CVX) stock is tied to oil-related equipment and data, to oil fields, pumps, and refineries, and to more buildings and employees, among other things. It's not likely that those kinds of assets will suddenly become worthless, or that the demand for energy and medications will shrivel up. Great companies tend to hold their value.
Gold's mixed results
Those who think gold is a great investment need to think again, too. Sure, it can be one. And it has been one -- now and then. But over long periods, it doesn't have the best track record. Check out what $1 invested in various things between 1802 and 2006 would have grown to:
|
Investment
|
Real Return, in 204 Years
|
|
Dollar
|
$0.06
|
|
Gold
|
$1.95
|
|
T-bills
|
$301
|
|
Bonds
|
$1,083
|
|
Stocks
|
$755,163
|
Data: Jeremy Siegel, Stocks for the Long Run.
As you can tell from the dollar's return, those numbers are inflation-adjusted. A mere $100 investment would have netted you more than $75 million in stocks, while your money wouldn't even have doubled in value if you owned gold.
I know, none of us will be investing for 204 years. And gold has done well lately; it recently topped $1,000 per ounce. That's more than twice where it was five years ago. But check out these returns:
|
Between
|
Total Gain or Loss
|
|
1900 and 2000
|
1,372%
|
|
1900 and 1950
|
83%
|
|
1970 and 1980
|
1,607%
|
|
1980 and 1990
|
(38%)
|
|
1990 and 2000
|
(27%)
|
Data: National Mining Association.
Clearly, you can do rather poorly with gold over various long periods. The 1970-to-1980 period is legitimately exciting, with an annualized 33% gain. But even the overall 1,372% gain isn't so hot, since it's over 100 years. Annualized, that comes out to just 2.7%.
You can do better
So go ahead and invest some of your money in gold if you really believe in it. Just know that with prices near all-time highs, it might be more likely to fall in value than to keep rising -- which is why it's good to seek out investments that seem cheap. But consider parking much of your money in places where it's most likely to grow well for you, such as stocks.
You could follow the advice of Warren Buffett and us at The Motley Fool and just opt for one or more simple index funds, which will track the overall stock markets for you. The Vanguard S&P 500 (VFINX) fund, for example, tracks 500 of America's biggest companies, including Hewlett-Packard (NYSE: HPQ), Disney (NYSE: DIS), and DuPont (NYSE: DD).
If you want to aim even higher than that, you might add a handful of carefully selected stocks to your mix. One way to find some is to screen for them. Here, for example, are some potentially undervalued companies I found when I screened for market caps of $2 billion or more, price-to-earnings (P/E) ratios of 20 or less, three-year revenue growth rates of 10% or more, and four or five stars (out of five) in our CAPS community of investors:
|
Company
|
CAPS Stars
|
Market Cap
|
P/E
|
3-Year Growth
|
|
Flowserve (NYSE: FLS)
|
*****
|
$5.8 billion
|
14
|
14%
|
|
CVS Caremark (NYSE: CVS)
|
****
|
$43.6 billion
|
13
|
29%
|
|
Agrium
|
*****
|
$8.1 billion
|
10
|
36%
|
|
Archer-Daniels-Midland
|
****
|
$20.8 billion
|
18
|
21%
|
Data: Motley Fool CAPS.
Of course, you'll still need to research any such candidates further.
An easier alternative is to let trusted resources point you to compelling contenders for your portfolio. Our Motley Fool Inside Value newsletter recommends two such stocks each month, as our team seeks out undervalued and temporarily unloved companies. I invite you to test-drive the service for free for a whole month. You'll be able to access every issue, and every one of the recommendations that have been topping the market handily for more than five years now.
This article was originally published Oct. 7, 2009. It has been updated.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Walt Disney is a Motley Fool Stock Advisor and an Inside Value selection. The Motley Fool owns shares of Flowserve. The Motley Fool is Fools writing for Fools.
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