When the equities sell-off reached its zenith in mid-March, many investors ditched the stock market for alternative assets such as Bitcoin. The virtual cryptocurrency can be traded like anything else on an exchange and recently, its price has risen sharply. But despite its appeals, I’d still invest in cheap UK shares to build serious wealth in the long run. Why? Well, let me explain.
The problem with Bitcoin
The price fluctuations of most cryptocurrencies make for a stomach-churning ride. In fact, it’s not rare for upswings and downswings of 20% or more to occur within the space of a few weeks. This makes it difficult to assign any significant role to Bitcoin in a portfolio when it comes to building wealth over the long term.
What’s more, after 11 years in circulation, the cryptocurrency is still not widely accepted or recognised. For me, this raises concerns regarding the long-term viability of the virtual currency.
Perhaps the main problem with Bitcoin is that its value is determined by pure speculative demand. In other words, there is no measurement to determine what the intrinsic value of the asset might be. Don’t get me wrong, that’s no reason to cast Bitcoin aside, but as for using it to build long-term wealth, it’s a no go in my eyes.
To clarify, I’m not completely ruling out a small exposure to Bitcoin as part of a well-diversified investment portfolio. Rather, I’m warning against using Bitcoin as your core asset to build capital in the long run. The reason being is that I think there are much safer and superior options.
The strength of cheap UK shares
Despite the recent volatility in the stock market, investing in shares is a tried and tested way of building long-term wealth. Stick at it for long enough and you could even reach a six-figure portfolio.
I’d focus on identifying companies with strong market positions, stable earnings growth and solid business fundamentals. Think of companies such as Unilever, GlaxoSmithKline, and BAE Systems. Alternatively, you could hoover up the entire market with a UK tracker fund like the HSBC FTSE All Share Index.
Either way, after every major sell-off, the stock market has gone on to reach new highs. We’ve already seen this in the wake of the 2020 market crash with the American tech-heavy index, the NASDAQ 100. This underscores the importance of sticking at it for the long term. That way, you can ride out any temporary downswings and also enable the process of compounding returns to take effect, which is key to generating serious wealth.
The miracle of compound returns
To illustrate, if you invested £400 a month and managed to receive an annual return of 9% (similar to that of the FTSE 100’s historic annual return), you’d have an investment pot worth £1,085,200 after 35 years.
Ultimately, I reckon that building a well-diversified portfolio of quality UK shares is a superior and safer way to build serious capital over the long term. On top of this, many are trading on cheap valuations at the moment, so what are you waiting for?
Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. 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.