Investors worried about inflation have a difficult job trying to choose investments right now. I think investment trusts offer me the best hope, and I’ll explain why.
I think it’s a lot easier to identify stocks that are likely to suffer from inflation. The retail sector, for example, can hurt when people have less disposable income. So avoiding consumer discretionary businesses can help.
But I reckon the investments with the best resistance to inflation share a number of characteristics. And I think those can all be found in the investment trust sector.
Eggs and baskets
I’d say it’s more important to diversify our investments now than ever. It helped a lot of investors during the Covid downturn. And it will surely help them through high inflation, and whatever comes next.
An investment trust comes with diversification thrown in. If I have a modest sum to invest, I’m limited in the number of different stocks I can realistically buy. And if I spread my money too thinly, I’ll pay too much in fees.
But if I take a stake in an investment trust, I get diversification across its range of individual holdings. And I only have to pay one broker’s fee, to invest in the trust itself.
I do, though, think diversification is best combined with my next factor.
Strategies
An investment strategy is important at the best of times. But during a rough patch, if I don’t have a strategy and stick to it, I’m more likely to go off and make wild investments that I don’t properly understand.
My strategy consists mostly of seeking income from UK dividend shares. Investment trusts like City of London and Murray Income target that approach. And having raised their annual dividends every year for decades, they have proven expertise.
If I go for dividend income, and my chosen investment trusts keep generating it for me, the actual share prices don’t really matter. At least not until I eventually want to sell, way in the future.
Investment trusts cater for all kinds of strategies. So individual investors can pick the approach they feel most comfortable with.
Long-term horizon
The most important factor in overcoming short-term inflation surely has to be patience. Investing with a long-term horizon has overcome countless crises during my lifetime. And I remain convinced it’s the best path through present and future difficulties too.
Investment trusts score on two counts for me in the long-term stakes. They tend to have their own long-term outlooks, especially those with extensive records of dividend performance.
And their managers, who work for me as a shareholder, are carrying out any needed adjustments. That means I’m less likely to tinker with my investment portfolio. Short-term tinkering is tempting at times like this. But it’s usually best avoided.
Risky times
None of this, of course, will guarantee freedom from the pain of inflation. To some degree, as investors, we just have to accept it as one of those short-term risks. And investments trusts are actually single companies themselves, and can individually go wrong.
But I rate buying a number of investment trusts as my best chance of coming out ahead in the long run.