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By investing in a Self-Invested Personal Pension (SIPP) and aiming to increase the value of the funds invested, I believe it is possible to increase one's financial foundation for retirement.
For example, if you had £50,000 and could put it into a SIPP now or in the next few years, this is how you would try to build up a quarter of a million pounds worth of it even without investing any more money.
Getting the calendar right
Let me start with what I think is an obvious point but worth mentioning anyway: this is not a quick plan.
I am actually talking about quintuple the value of my SIPP. I would love to own stocks that would grow fivefold quickly, but they are few and far between.
Instead, I take a long-term investment approach and would like to keep risks at a level that is comfortable for my own tolerance.
Long-term value creation
By simply purchasing shares for less than their value, I could hope to increase the valuation of my SIPP. On the other hand, some stocks trade for less than their intrinsic value year after year.
Therefore, my focus would not be solely on price. Rather, I would focus on companies that I believe have the opportunity to grow earnings over the long term, with share prices that don't reflect that.
Growth or income?
An example of a stock that I think could be undervalued relative to its long-term business prospects is JD Sports (LSE: JD).
The sports retailer has set out an ambitious multi-year growth plan that sees hundreds of new stores opening each year. This year it has also announced plans to take over a major American rival. However, the shares are 14% cheaper than a year ago. They have only risen 8% in five years, even less than the 11% achieved by the FTSE 100 index of which JD is a member.
If I had bought this for my SIPP five years ago then I would be looking at a share price just 8% higher than what I paid and a paltry 0.7% return.
Why not just go for high-yield stocks?
After all, several FTSE 100 stocks are yielding over 9% right now. If I could compound my SIPP at 9% a year, my £50,000 would be worth over £250,000 in less than two decades.
Growth and income potential
I own some high-yielding shares in my SIPP.
But to achieve the goal, I would like to make sure I have some growth stocks like JD as well. My theory is that if a company continues to do very well over the long term, hopefully that will be reflected in a growing share price if I haven't overpaid. Dividend income could be the icing on the cake.
With its large store network, strong brand, international presence and pricing power, I believe JD could grow significantly in the coming years. Maybe I'm wrong if, for example, a weak economy cuts consumer spending on expensive sneakers.
But by diversifying my SIPP and considering value creation from share price growth and not just dividends, I hope to do well over the coming decades.
