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Investing money in a SIPP and buying quality blue chip shares to hold for decades can be a lucrative way to prepare for retirement, no matter how far away it may seem today.
But maximizing the value of one's SIPP is not just about maximizing earning opportunities.
It also means trying to avoid costly mistakes. Here are three of those investment mistakes I am actively looking to avoid with my SIPP.
Not paying attention to costs and rates.
The difference between 1% and 0.5% may not seem like much.
But as an annual fee, if applied each year on the value of an investment with a time period measured in decades like a SIPP, even the smallest differences can have a very large financial impact.
For example, I like to receive paper statements for my SIPP. But when I realized how much Hargreaves Lansdown was charging me for them, I switched to digital only, as well as comparing that provider's SIPP costs more generally with other options.
Take a short-term approach
As a long-term investor, it's no surprise that I generally view a short-term investing mindset as a potential mistake. But whilst sometimes understandable, when it comes to a SIPP I think the vehicle is perfectly suited to taking a long-term approach.
This can work in two ways.
For example, perhaps a stock that is performing well now has different long-term prospects. That's a risk I consider in owning high-yield tobacco stocks, given the decline in cigarette smoking.
But it can also mean identifying a stock that I think has great long-term potential, even if it's going through a rough patch.
That's why I keep my shares in Topps Tiles (LSE: TPT) despite recent performance having been disappointing. The stock has fallen 38% in value over the past five years. Last year's revenue was down 6% (albeit from a record level).
While the 9% dividend yield certainly attracts attention, it may be at risk if earnings are weak. This year's interim dividend per share was, for example, 1.2p, while basic earnings per share was negative -1.1p.
However, in the long term, consumers and professionals will want to decorate and renovate kitchens and bathrooms. Topps has economies of scale, selling one in every five tiles purchased in the UK.
It has been growing its online business and acquiring assets from a failed rival this year (currently under review by competition authorities) could help it build its presence among targeted professional clients.
too good
Another mistake to avoid is letting the SIPP become unbalanced.
It's not just about diversifying: it's about stay diversified. As an example, let's say five years ago I split a £100,000 SIPP 10 evenly between five shares that haven't gone anywhere since, four that have grown 10%, and NVIDIA.
Ignoring dividends and fees, my SIPP would now be worth £372,000. However, without even touching my SIPP, once diversified, the incredible rise in Nvidia's share price would mean that stock now represented 75% of all my SIPP assessment.
Diversification is not just about initially allocating a SIPP. It can also mean selling stakes in big winners, as Warren Buffett has been doing with his Apple bet.
