So you want to invest in shares. But you have only a modest amount of cash on hand. And what on earth do you buy?
All the experts reckon you should have a diversified portfolio, that you shouldn’t have all your eggs in one basket. The only problem with that argument is that it assumes you have more than one egg.
Well, these days you have some viable options even if your means are modest. A little while back we discussed Exchange Traded Funds, vehicles that allows you to invest in the overall stock market, particular segments of the market, foreign markets, gold, commodities and host of other things.
They are great for what they offer. But essentially most of them simply track the performance of the market or the segments they chase. You’ll get what the market delivers.
The other method, and the most popular in recent times, is to stick your cash in a managed fund, where an expert will invest it for you and hopefully beat the market performance.
But there is a third option and it is one of the oldest available but one that has been overlooked in the rush for the new.
There are some companies that are listed on the stock exchange that do nothing other than invest in other companies listed on the stock exchange. Not surprisingly, they are called Listed Investment Companies and in Australia we have about 60 of them.
Some of them have been going for the best part of a century. They include names like Australian Foundation Investment Corporation, Argo Investments, Milton Corporation, Djerriwarrh, Australian United Investments and Carlton.
Then there are newer ones such as Wilson Asset Management, Contango, and Clime.
What’s so special about LICs? Generally, they perform better than managed funds and certainly better than ETFs. And they do so for some quite specific reasons.
Like managed funds, these are investment vehicles that are actively managed. There’s a team of experts there hunting out bargains and looking for growth opportunities. Unlike managed funds, however, they are generally run on a cheaper cost base.
And whereas with a managed fund, you hand over your cash for it to invest, with a Listed Investment Company, you buy shares in the company. What’s the difference? Well a fund manager is usually inundated with cash when the market is running hot. But when things sour, as they did in 2008, he or she is forced to liquidate investments in order to hand cash back to the clients. So often, they are forced to buy high and sell low.
LICs don’t have that pressure. They have a pool of cash that is constant. If clients want out, they simply sell shares in the LIC on the market.