Imagine having enough income-generating assets to be able to retire early and spend your days doing whatever you want to do. Sounds pretty good right? That’s what financial independence is all about – having sufficient personal wealth to live off without the need to work actively to generate an income.
While it probably seems a million miles away for many people, with a plan and a long-term investment strategy there’s absolutely no reason why it’s not achievable. The key, in my view, is starting early, saving consistently, keeping fees and taxes low and not taking outsized risks with your capital. With that in mind, today I’m profiling three diversified investment trusts that could help you achieve financial freedom sooner.
The City of London Investment Trust
With an outstanding dividend growth history, having increased its dividend every year for over 50 years now, The City of London Investment Trust (LSE: CTY) could make an excellent core holding for those seeking regular increasing dividend payments.
The trust is managed conservatively, and while it’s free to invest across the whole FTSE 350 index, the largest holdings are blue-chip FTSE 100 giants such as British American Tobacco, Royal Dutch Shell, HSBC, Diageo and Vodafone Group. The portfolio currently holds 116 companies, meaning shareholders receive strong diversification benefits though just one security.
Over the last five years to the end of May, the trust’s net asset value (NAV) has increased 96% vs a 78% return for the FTSE All-share index. Management fees are low at just 0.37%.
The Edinburgh Investment Trust
Another popular investment trust with a strong long-term record is The Edinburgh Investment Trust (LSE:EDIN), which aims to achieve capital growth in excess of the FTSE All-share index, and dividend growth that exceeds the UK inflation rate.
Run by Mark Barnett, who succeeded Neil Woodford in running the Invesco Perpetual High Income Fund, the trust generally invests in UK stocks but has the freedom to invest 20% of the portfolio outside the UK. The top five holdings at the end of May included Reynolds American, British American Tobacco, BP, AstraZeneca and Imperial Brands.
The trust’s NAV increased 120% for the five years to the end of May and management fees are 0.55%.
Scottish Mortgage Investment Trust
Lastly, for those looking for a more growth-oriented investment trust, the Scottish Mortgage Investment Trust (LSE:SMT) could be a good option. Launched in 1909, this is one of the UK’s largest, with net assets of over £4bn.
Don’t let the name put you off, the Scottish Mortgage Investment Trust invests in global equities and has nothing to do with mortgages. Stocks are carefully selected for their strong growth prospects and top holdings at the end of May included Amazon.com, Tesla Inc, Tencent Holdings, Inditex and Illumina.
For the five years to the end of May the trust’s NAV increased 195% vs 112% for its benchmark, the FTSE All-world index. With a low total ongoing charge of just 0.45%, this trust could be an excellent way of gaining international exposure at a reasonable price.
If you're serious about financial independence, start here
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Edward Sheldon owns shares in The City of London Investment Trust, Royal Dutch Shell B, Diageo and Imperial Brands. The Motley Fool UK owns shares of and has recommended Amazon and Tesla. The Motley Fool UK has recommended AstraZeneca, BP, Diageo, HSBC Holdings, Imperial Brands, and Royal Dutch Shell B. 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.