A lot of people starting out in investment are a bit scared by the possibility of losing money if their shares fall, and thats a serious concern.
Once you have a broad portfolio and youre already sitting on long-term profits, handling short-term falls becomes second nature. But if youve only built up one or two stocks, a downturn can be very discouraging.
Thats one of the reasons I like investment trusts, as they effectively pool shareholders money across a wider range of investments, and that can lead to reduced volatility.
I dont hold any investment trusts now, but I have done in the past, and I have several on my watchlist. Here are two.
Big discount
One isCaledonia Investments (LSE: CLDN), which I gave a nod to back in October. The trust has a widely diversified portfolio, but its speciality is uncovering and buying up smaller companies with growth potential and its been doing pretty well at it.
Its global in its outlook too, so I also see Brexit defence characteristics there.
Caledonia shares have done well since I last looked at them. While the FTSE 100 carried on sliding throughout the final quarter of 2018, the investment trust went in the opposite direction.
As a result, over the past 12 months the shares have gained 9% while the FTSE 100 has lost 1% and the trust is up 53% compared to just 8% for the index over five years. Dividends work the other way, with Caledonias 2.2% yield in 2018 about half the FTSEs but its still a significant overall winner.
Net Asset Value (NAV) per share stood at3,441p at 31 December, and with a current price of 2,999p the shares are trading at a discount of 13%. I think thats a bargain.
Better record
My colleaguePeter Stephens seesAlliance Trust (LSE: ATST) as an attractive candidate for a starter portfolio, and I agree.
Alliance Trust refocused its investment approach in 2017, and its perhaps a little early to tell how thats likely to work out. But were looking at an even better five-year performance thanCaledonia Investments, with a rise of 65% and dividend yields have been similar at around 2%.
Unsurprisingly, shares of a trust with that recent performance are closer to its NAV per share, but theyre still trading at a discount of 5%. That means investors value the company as a whole at 5% less than the assets it owns, and I see another undervaluation here.
Although dividend yields are not great, the trusts progressive policy should see the actual cash rising ahead of inflation and over a couple of decades, that can work wonders for your income levels.
Again, Alliance Trust invests globally, and that carries the same relative lack of exposure to Brexit worries in the UK. And I think diversification is important in the early days of your portfolio generally, as it provides a bit of a buffer against local shocks.
I like both
At my stage of investment I dont really need that single-stock diversification, but Im looking at these trusts from a different perspective. Although Im mainly a dividend investor these days, its not 100%, and Im seriously considering the two of them for the more modest growth portion of my portfolio.
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