Stocks That Are Better Than Gold

It's tough to beat gold. 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 as the shiny yellow stuff. Unfortunately, they're wrong.

You might think gold is safe because it's a tangible item that exists in limited quantities, and because piles of gold bars in a vault somewhere won't lose their worth anytime soon. But stocks are similarly tied to tangible assets: actual bricks-and-mortar companies.

Costco stock represents stores, employees, and merchandise. Bristol-Myers Squibb stock is connected to people, buildings, research, patents, and drugmaking equipment, among other things. It's not likely that those kinds of assets will suddenly become worthless, or that the demand for affordable goods and necessary medications will shrivel up. Great companies tend to hold their value.

Gold's mixed results
Sure, gold can be a great investment. And it has been -- every now and then. But over long periods, it doesn't have the best track record. Check out what just $1 invested in various things between 1802 and 2006 would have grown to:

Data: Jeremy Siegel, Stocks for the Long Run.

A mere $100 investment would have netted you more than $75 million in stocks (adjusted for inflation). With gold, your money wouldn't even have doubled.

True, few of us will be investing for 204 years. And gold has done well lately, recently topping $1,000 per ounce. That's more than twice where it was five years ago. But check out these gold returns:

Data: National Mining Association.

Clearly, you can do rather poorly with gold over various long periods. The 1970-1980 period is legitimately exciting, with an annualized 33% gain. But even the overall 1,372% gain isn't so hot, since it takes place over 100 years. Annualized, that comes out to just 2.7%.

You can do better
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 from here than to keep rising. That's why it's good to seek out investments that seem cheap. Consider parking much of your money where it's most likely to grow -- including stocks.

You could follow the advice of Warren Buffett and us Fools, and just opt for one or more simple index funds to track the overall stock markets. The Vanguard S&P 500 (VFINX) fund, for example, encompasses 500 of America's biggest companies, including Sprint Nextel (NYSE: S), Qualcomm (Nasdaq: QCOM), and Microsoft (Nasdaq: MSFT).

If you want to aim even higher, screen for a handful of carefully selected stocks to supplement your holdings. Here, for example, are potentially undervalued companies I found when I screened for market caps of $500 million or more, price-to-earnings (P/E) ratios of 20 or less, three-year average revenue growth rates of 7% or more, and four or five stars (out of five) in our Motley Fool CAPS community of investors:

Motley Fool CAPS, Yahoo! Finance, as of March 15.

Don't forget that you'll still need to research any such candidates further.

For an even easier alternative, let trusted resources point you to compelling contenders for your portfolio. Our Motley Fool Inside Value newsletter recommends such stocks each month (including a list of "Best Buys Now"), as our team seeks out undervalued and temporarily unloved companies. To read every issue, and see every one of the recommendations that have been topping the market handily for more than five years now, test-drive the service free for 30 days.

This article was originally published Oct. 7, 2009. It has been updated.

Longtime Fool contributor Selena Maranjian owns shares of PepsiCo, Costco, Microsoft, and Novartis. Costco, Microsoft, and Sprint Nextel are Motley Fool Inside Value recommendations. Costco Wholesale is a Motley Fool Stock Advisor pick. Melco Crown Entertainment and Novartis AG are Motley Fool Global Gains choices. PepsiCo is a Motley Fool Income Investor selection. Motley Fool Options has recommended a diagonal call position on Microsoft. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Costco Wholesale. The Motley Fool is Fools writing for Fools.