Putting away regular cash into a Stocks and Shares ISA can be a great way to build up long-term wealth. But do you ever realise you’ve saved enough for a share purchase, but can’t decide what you want to buy?
It happens to me a lot. And the fact that I usually only hold a relatively small number of stocks makes it a tougher decision.
Do I really want to invest in, say, my ninth favourite stock when I already hold eight, just because I want to do something with the cash?
Diversification
I could top up one of my favourite stocks. But I only really like a few sectors, and that could risk harming my diversification.
Do I want to get too heavily into banks? With the troubles hitting the financial sector in the past decade and more, no thanks.
A friend tells me he does something simple. He puts spare ISA cash into an index tracker fund when he can’t decide. And that way he keeps his ISA fully invested.
If he later finds a stock he really wants, he can sell some tracker fund shares to pay for it. He reckons he should gain enough on average to cover the extra trade cost.
Will it work?
Rather than an index tracker, I think I’d use a diversified investment trust that sets income as one of its targets. Maybe more City of London Investment Trust (LSE: CTY).
It’s currently on a forward dividend yield of 4.76%. And, depending on how long I stayed with it, that could easily pay enough to cover a new transaction cost when I finally decide on something I like better.
So, put each chunk of cash into an investment trust, and then only sell and transfer it when I find something I really really want. That could work.
And I think I see another benefit.
Bigger benefit
City of London is already one of my favourite investments. That’s mainly because it’s lifted its dividends for 38 years in a row. But it gives me very good diversification just from one single investment too.
So even if I don’t find anything else I’d prefer to own, I reckon my cash should be fairly safe just building up in this trust.
It would be spread across Shell, BAE Systems, AstraZeneca, Tesco… and a whole load more UK companies.
Keep it there
An investment trust could still go bad, mind. I’m still having to trust one single management team with all the underlying investments. And the City of London share price hasn’t done much in the last 10 years. Also, if we don’t get that dividend rise one year, I could see the price tumble.
So, maybe find two or three more diversified investment trusts with strong dividend track records.
Murray Income Trust (with a 4.7% dividend and 51 years of rises) and Merchants Trust (5.0%, 42 years) seem like clear candidates.
Then put my ‘waiting’ cash in them, with half a plan to just leave it there? It could take the stress of making decisions off me.
This post was originally published on Motley Fool
