Finding the right shares to own in a Self-Invested Personal Pension (SIPP) can be an important element of financial planning for retirement.
But where to start? Here are some principles I think could help someone as they think about how to construct their portfolio.
No matter how brilliant a company may be – or how well its share price has performed over the long term – it is possible to have too much of a good thing.
In the stock market, that comes down to a lack of diversification. Spreading the money in a SIPP across different companies is basically a financial equivalent of not keeping all your eggs in one basket.
Fortunately, a £100k SIPP would be big enough to diversify easily, for example, by spreading it evenly across 10 different shares.
So, having spread the money like that, will a SIPP be diversified?
Initially, yes. But that can change without buying or selling any shares.
For example, one share in the SIPP may do brilliantly. That does not sound bad! However, it can mean a diversified SIPP becomes far more concentrated over time, with one or two shares representing most of its value.
It is therefore important to consider from time to time whether any changes are needed to keep the SIPP diversified.
Diversification is not just about individual shares – it involves business sectors too. Owning 10 shares offers some diversification – but less so if all 10 are financial services shares.
I understand: a strong focus on a single sector can be appealing. Five of the highest-yielding FTSE 100 shares right now are financial services firms.
But some sectors can be highly cyclical. It is important to try and construct a SIPP in a way that it will hopefully do well over the long term, not get sunk by a downturn in the economic cycle or shifts in business trends.
Does it make sense to put most of the SIPP into shares you understand and a bit into some speculative ones you know little about?
As an investor not gambler, it makes no sense at all to me.
Someone can try and build SIPP wealth through share prices growing, dividends piling up, or both. But whatever approach chosen, I find it helpful to be able to articulate it – and understand how each share in the SIPP fits that investment strategy.
To illustrate, one share I own in my SIPP is S4 Capital (LSE: SFOR).
The digital advertising agency share has performed terribly over time. My shareholding shows a sizeable paper loss.