Diversify faster, with investment trusts

Buying one’s first few shares can be scary. Buying the very first one can be especially scary.

Yes, there’s unfamiliar terminology to navigate, and new processes to master. But worse than that, there’s a lack of diversification. Quite literally, all your eggs are in one basket — the company that is that very first share.

Which is why many of us, truth be told, tend to select businesses with which we’re familiar, when selecting our first few shares — High Street stalwarts, or businesses products stock our cupboards and refrigerators.

Tesco, Unilever, Shell, GSK, HSBC: for novice investors, companies such as these seem much less of a leap in the dark.

Diversification, one share at a time

Gradually, with each successive share, your diversification builds. With two shares, you’re twice as diversified. Three shares, three times as diversified. And so on, and so on.

Judiciously chosen, so as to spread risk and exposure, by the time you get to 10–15 shares, bad news affecting any one individual share shouldn’t have a material impact on the portfolio as a whole.

But — as I say — getting to that point can be uncomfortable.

Yet there’s a better way to go about building diversification. A way that delivers diversification from that very first share purchase.

What is it? Simple: investment trusts.

Investment funds: right idea, wrong answer

Most investors ‘get’ the idea of investment funds. Heavily marketed in the finance pages of Sunday newspapers and the like, they’re ‘baskets’ of shares, handily combined together in a single investment.

Often, there’s a theme to the basket — growth shares, or income shares, or North American shares, or Asian shares, or mining shares, or pharmaceutical shares. You get the idea.

But here at The Motley Fool, we’re not a fan of investment funds, and never have been.

How come? High charges, for one thing. A lack of real-time pricing, for another: place a buy or sell order, and it won’t be executed until the following day, at which point the buying or selling price will be struck.

Their one advantage: instant diversification. Buy a fund, and you’re buying a small stake in 60–100 companies

Introducing investment trusts

But there’s a way of getting that same diversification — that instant stake in 60–100 companies — without the disadvantages of investment funds: investment trusts.

They’re also diversified baskets of shares, often available with those same ‘themes’. Indeed, some of the larger investment houses often manage essentially the same basket of shares, as both an investment fund and as investment trust. No prizes for guessing which one I buy, in those situations.

You buy investment trusts just as you do a share. They have ‘ticker codes’, in just the same way. The charges are usually lower than investment funds, and you get real-time prices. Place a buy or sell order, you’ll know the price before pressing the ‘execute’ button.

Venerable stalwarts

Now, if you’re new to investing, you might imagine that investment trusts are some new-fangled financial innovation, untested in the long run.

Not so. Among the very largest trusts, the youngest — Monks — dates back to 1929. The oldest, F&C Investment Trust (formerly Foreign & Colonial) dates back to 1868.

One of my very largest holdings, City of London Investment Trust, was incorporated in 1891, but actually dates back to 1860. Its manager, Job Curtis, has managed the trust since 1991.

Scottish Mortgage, another stalwart in my portfolio, dates back to 1909. Murray Income Trust, yet another stalwart, 1923. Temple Bar, 1926. The North American Income Trust, 1902. And so on, and so on.

Some trusts are newer, though. Abrdn Asian Income, another one of my largest holdings, was founded as recently as 2005. Schroder Oriental Income, likewise. And BlackRock Energy and Resources Income Trust, 2005 again — 2005 was obviously a good year for founding investment trusts!

(Incidentally, some trusts have “fund” in their names. Don’t be confused by this: if it has a ticker, it’s a trust, not an investment fund.)

Worth researching

Where to find out more about investment trusts? The Motley Fool, obviously. But I’d also recommend a visit to the Association of Investment Companies, to which many trusts belong: they publish a lot of useful data tables and articles. And in terms of books, John Baron’s guide Investment Trusts is an easy-going read.

Either way, the information is there. So if investment trusts aren’t yet on your investing radar, it could be time to put that right.