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Diary of a dumb investor: me, myself and investment trusts
In response to reader suggestions I’ve been looking at investment trusts as a way to turn my little windfall into a fortune.
I’ve managed to get a bit of perspective since last week, when I was swinging between sickening fears of totally squandering a windfall and wild hopes of accruing great wealth.
For first-time readers: my great uncle has given me £10,000 to invest and, over the last couple of weeks, I’ve been trying to figure out the best way to do this.
I’ve done quite a lot of dithering, as I really don’t want to mess this up. But this week I can announce that I’ve reached my first concrete decision: I’m going to go with the Hargreaves Lansdown platform. There seems to be agreement that it’s the most user-friendly, and since I don’t plan on becoming a ‘day trader,’ I should be able to keep the costs to a minimum.
I’m grateful for the advice offered in response to my last diary entry – especially to Chris Marsden for explaining the meaning of that rather enigmatic northern phrase 'there's aye a soming'. I notice that the doubts as to my existence are persisting; I can only hope that these will ebb when you see some documentary proof.
What I found really helpful was the detailed discussion of investment trusts, in response to my apparent neglect of what could be really great money-making vehicles.
What I've learned about investment trusts
From some reading around the subject, I understand that these are listed companies which invest in the shares of other companies. I'm impressed with the idea that their charges are generally cheaper than unit trusts.
I also like what I hear about their 'closed ended' structure, which means they issue a limited number of shares to investors. This is different from unit trusts which are 'open ended' because they can create and delete units in response to investor demand. This is said to make investment trusts more resilient because if the stock market crashes, investment trusts do not have to sell their holdings to give money to investors looking to sell.
As a young (I'm not yet 30) investor I like the idea of choosing an area and sitting through the ups and downs in the hope that returns over the long term will be good.
However, I'm still getting my head around the issue of premiums and discounts.
Unlike units in open-ended funds, the share prices of investment trusts don't always reflect the investment return the trust is generating. So if the trust is popular, its share price can trade above the value of the trust's investments (that's the premium). More often than not, though, investment trust shares trade below the 'net asset value' of the portfolio (that's the discount).
Rather confusingly, I have been told that discounts can create opportunities to buy investment trust shares on the cheap. On the other hand, if you are a long-term investor, the issue of discounts or premiums is not so relevant? I will have to ponder that some more.
A punt on property?
Anyway, to business: I’ve read that according to IPD (Investment Property Databank) figures UK commercial property had a bumper 2010, generating a total (capital plus income) return of 15.2%. It appears that property has bounced back from the financial crisis as confidence in the UK economy has grown.
More about this:
Look up the funds
Look up the investment trusts
Look up the fund managers
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- Diary of a dumb investor: planning my portfolio
- Diary of a dumb investor: picking a platform
- Diary of a dumb investor: getting started
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