Is it possible to passively build a passive income for retirement? By that, I mean is it possible to take a hands-off approach to investing and still grow my investment pot?
I believe it is possible to get acceptable investment returns with a minimum amount of effort. But not with no effort at all. For example, there’s no avoiding the initial effort required to pick some quality, enduring long-term investments in the first place. And it will likely be necessary to spend time reinvesting accumulated dividends if there’s no automatic option available.
Laid-back investing for passive income
And if there’s a corporate action such as a rights issue or a takeover with one of the companies underlying my shares, I may need to do something. But I can avoid frenzied investment activity. And I won’t need to pore over company accounts while hunched over my computer for hours on end. I may sacrifice a few percentage points in annual gains, but I’ll likely gain greater balance in my life.
I’d choose a few quality shares such as Unilever, AstraZeneca and Severn Trent. But another way to achieve my investment goal would be to ‘outsource’ the share picking to a manager. And I’d do that by buying into collective funds. So, I’d end up with diversity between many underlying shares in each fund and diversification across funds. And to achieve that I’d likely choose between the options available in investment trusts.
An investment trust is a fund set up as a company in its own right. We can buy and sell shares in investment trusts just like we can the shares of just one individual business. Investment trusts own a portfolio of shares and sometimes other assets picked by the fund manager. So, by buying shares in an investment trust, I’d get an investment based on the underlying performance of the trust’s portfolio.
Doing my own research
The only way to invest in an investment trust is to buy its shares. The fund underlying the trust is closed-ended, meaning it’s a fixed size. And it won’t be affected by investors putting money in or taking it out of the fund, which can be problematic for open-ended funds. But because investment trusts trade on the stock market like any other share, the share price can alter the valuation as it moves up and down. So, at times, the market capitalisation can move away from the underlying asset valuation.
I’ll need to do my own research to make sure my investment trust is worth the valuation I’ll be paying when I buy its shares. But the set-up has the advantage that the manager can borrow money to enhance returns. And the trust can also smooth out shareholder dividend payments by keeping some money back in the good times and distributing it to shareholders in the lean times.
I’d go for trusts run by managers with a decent long-term performance record, such as Nick Train. So, I’d consider the Finsbury Growth and Income Trust and the Lindsell Train Investment Trust. I’m also impressed by Terry Smith’s investment record so would consider the Smithson Investment Trust and the Fundsmith Emerging Equities Trust.
