Diversify faster, with investment trusts

Tradable just like shares, investment trusts have long offered instant diversification and lower costs than funds. If trusts aren’t already on your investing radar, it could be time to put that right.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Long-term vs short-term investing concept on a staircase

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.


However, don’t buy any shares just yet

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Secure your FREE copy

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Malcolm owns shares in Tesco, Unilever, Shell, GSK, HSBC, Scottish Mortgage, Murray Income Trust, Temple Bar, The North American Income Trust, Aberdeen Asian Income, Schroder Oriental Income, and BlackRock Energy and Resources Income Trust. The Motley Fool UK has recommended GSK, HSBC Holdings, Tesco Plc, and Unilever Plc. 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.

More on Investing Articles

UK money in a Jar on a background
Investing Articles

Here’s how a stock market beginner could start investing with £2 a day

Our writer illustrates how, even with just a couple of pounds a day to spare, a new investor could start…

Read more »

Investing Articles

£10k invested in 2025’s best-performing FTSE 100 stock one month ago is now worth…

Mobiles specialist Airtel Africa was the top FTSE 100 stock in January, after investors celebrated confidence-boosting results. So how long…

Read more »

photo of Union Jack flags bunting in local street party
Investing Articles

How much would an investor need in UK shares to earn an £833 monthly passive income?

For any investors hoping to make a passive income, UK shares might be one path towards the goal. Let’s take…

Read more »

Investing Articles

How much could a £20k Stocks and Shares ISA earn in the next decade?

If someone invested a £20k Stocks and Shares ISA now, what might they hope it to be worth in a…

Read more »

US Stock

Investing £750 in the S&P 500 a year ago would be worth this much now

Jon Smith explains why an investment in the S&P 500 last year would have beaten the FTSE 100, but cites…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here, in 5 steps, is how Warren Buffett turned £100 into £3,787,464!

Our writer learns a handful of lessons from the masterful investing career of Warren Buffett and his phenomenal long-term performance.

Read more »

Close-up of British bank notes
Investing Articles

£800 invested this February could be earning a second income by the summer!

Buying a portfolio of dividend shares is a proven tactic for building a second income. Here's how it could be…

Read more »

artificial intelligence investing algorithms
Growth Shares

2 FTSE stocks that could do well with the DeepSeek AI breakthrough

Jon Smith talks through the implications of the latest AI news and flags up some FTSE shares that could benefit…

Read more »