‘Work backwards’ towards your goals

Introducing a fresh pair of eyes to a situation can often yield enormous benefits.

Many of us will have experienced situations where we found ourselves virtually grinding to a halt, or creating unnecessarily complicated methods of dealing with a challenge, when along comes someone with a different take on tackling the hurdle we’re trying to overcome and hey presto, it’s resolved in double quick time.

I mention this because my accountant, who deliberately avoids providing specific investment advice to his clients, is, however, always prepared to offer an opinion as a friend. I’m convinced this explains why he insists his words of wisdom must be dispensed in a pub and most definitely explains why I am a big fan of investment trusts.

A few years ago, I asked him how he would suggest investing the relatively modest proceeds of an endowment policy for the long-term. In keeping with bean counters’ modus operandi, he first prefaced his response with the usual caveats his profession learn to recite shortly after they’re born.

He told me that he would always suggest ‘working backwards’ – in other words, first establish what you’re trying to achieve over a given period, then work back to the present day to establish how you will set about achieving your goal.

As advice goes it’s pretty simple, wholly in keeping with that uncanny fact of life – that when you’re searching for what you expect will be a complicated solution, the simple answer is actually the most effective.  

Which is where investment trusts come in. Having established at least part of what I wanted to achieve within a reasonably specific time span, I decided to tuck something away that would remain a long-term investment. Almost simultaneously, my accountant sent me some information which explained in greater detail how investment trusts work. Like most people, I considered them to be a subtle variation on unit trusts, but the appeal of investment trusts was twofold: first, they’re arguably much cheaper funds in which to invest and second, they’re specifically geared for long-term investment, ostensibly because they’re equity based.

‘Why not save yourself the time and invest direct?’ some readers may be asking, but I decided I should spread my risk and pay someone (ie, a fund manager) to do this bit for me.

In effect, an investment trust is an alternative method of investing in a professionally managed portfolio of shares, providing a useful means of investing in individual sectors or overseas markets where specialist knowledge is required. Investors buy shares in a trust company, which in turn invests the majority of its assets in shares of other companies.

Perhaps the most seductive feature of an investment trust, the one which differentiates it from a unit trust, is the fact that it is a quoted company; as the number of its shares never varies, it is referred to as a ‘closed ended’ fund.

Unit trusts, by contrast, can issue more units or re-purchase, ie effectively cancel, units according to demand. In other words, they run ‘open ended’ funds. This provides the investment trust manager with an inherent degree of stability as he or she does not have to make investment decisions in the light of sudden inflows or outflows of money and can, therefore, plan ahead with more certainty.

It all sounds so simple, doesn’t it? Of course, it isn’t, but long term investors who fancy spreading their risk while having exposure to equity markets could do much worse than consider investment trusts, a comparatively straight forward solution to one of those irritating long term investment dilemmas.

posted on 04 January 2013 18:18 byPJS