At the moment, the stock market is in an uncertain place. It’s hard to sift through companies and find gems in which to invest. Add into the mix the current high inflation, and investing to offset the erosion of my cash is another key aim. To solve current problems, investment trusts are becoming more popular. So why are the trusts a potentially smart investment choice for my money right now?
Understanding the basics
An investment trust sounds a very formal term to describe something that’s actually very simple. Looking at a real-life example is a good way to explain what this type of investment is. I’ve chosen the Scottish Mortgage Investment Trust, one of the most popular FTSE 100 options available.
I can buy shares in it just like a normal stock. The share price fluctuates every day. The main difference to other companies is that it uses its money to invest in other stocks.
This might seem a little confusing at first. Why would I buy a stock that doesn’t make a product or generate revenue like a conventional business? It’s a valid point, and some prefer to avoid trusts. However, they’ve become very popular since the start of the pandemic.
Why investment trusts appeal to me
The main appeal stems from the fact that this type of stock allows me to hand my money to a professional asset manager. It’s a cheaper way for me to gain this access than trying to invest in an alternative, such as a hedge fund.
Since the start of the pandemic, stocks have been very volatile. The wild swings make it hard for me to accurately pick winners consistently. Although I’ll always back myself, investing some of my cash in a trust takes the pressure off me. I can get exposure to a wide variety of stocks even with a relatively small investment. It also saves me the hassle of trying to personally replicate the buying and selling approach of a professional.
Further, because the trust is freely traded during the day, I can buy and sell easily and quickly. This is appealing, as some mutual funds can take several days to settle. If I want to realise my cash so that I can move speedily to take advantage of another investment opportunity, I can.
Finally, some trusts have the specific goal of generating income. Managers including Blackstone and BlackRock both have options that currently have dividend yields in excess of 7.5%. At a time when I want to try and make my cash work hard due to the high inflation rate, I think it’s a smart move to park some money here.
Points to remember
But I’m aware that such stocks do have risks. I’m completely out of control of the companies that the managers decide to invest in. If I’m bearish on a particular stock, I can’t prevent a trust from investing in it.
Another risk is that the share price doesn’t perfectly reflect the net asset value of all the shares held in the trust. If the share price is trading at a premium when I want to buy it, I could be overpaying which is something I keenly want to avoid.
That said, I feel the advantages outweigh the benefits overall so I’m making trusts a part of my investment strategy.
