One reason I buy shares is to help build a pension pot for retirement. But it can involve complicated decisions. After all, in the UK and US alone, there are thousands of different shares I can choose from. Sometimes I am tempted by a company and find myself wondering, “are these the best stocks to buy for my pension?”
Realistically, the “best stocks to buy” does not mean the ones that will turn out to be most rewarding to me in future. After all, nobody knows how a given share will perform tomorrow, let alone years from now. Rather, I assess shares using some specific criteria.
Growth or income
For example, one of the choices I face as an investor is how to split my pension between shares that have a growth focus and those that are more income-oriented.
Take my stake in digital ad agency network S4 Capital. It has never paid a dividend and I do not expect to receive one any time soon (although if it makes sizeable profits in future that may change). But I do think the company could grow strongly. In the second half, like-for-like net revenue growth at the firm was expected to come in at around 25%. That is quite a clip.
By contrast, I could opt for a company that I think has limited growth opportunities but throws off lots of spare cash it can pay out as dividends, such as cigarette maker Imperial Brands. The Bristol-based manufacturer has a dividend yield of 6.9%.
I own a lot of income shares in my pension portfolio, partly because they generate additional cash I can use to buy more shares. But if inflation stays high, the real value of such dividends could fall. Pension planning involves a very long-term perspective, so I expect periods of both high and low inflation.
Sometimes I come across what I think might be appealing stocks to buy for my portfolio but decide that they are too risky.
Each individual investor’s own risk tolerance is different. But I find it can be easy for me, especially when looking at the long term, to pay too little attention to risk. Since I am looking to buy shares with an investing time frame measured in decades, I risk feeling overly confident that some bad mistakes will ultimately be cancelled out by other choices.
It is true that some strong performers in my portfolio could help mitigate some weak ones. Indeed, that is the thinking behind the key investment principle of diversification. But why put money into any shares I reckon are quite risky?
Learning from Warren Buffett
The reason I think some investors do that is because they are attracted to “high risk, high reward” situations. I am not. As Warren Buffett says, the first rule of investing is “never lose money” – and the second rule is never to forget the first.
I therefore try to steer clear of shares that may be appealing but are too risky for my tastes. One way I aim to do that is by focussing not only on maximising my upside, but also on trying to limit my downside. That is why I try to find well-run, consistently profitable blue-chip companies with a compelling business model.