Putting away some money on a regular basis to build a Self-Invested Personal Pension (SIPP) could help get my finances better prepared for retirement.
While that has an obvious attraction, knowing where to start can be confusing.
But putting off building a retirement fund would give me less time before I want to withdraw money. From a long-term investing perspective, that could mean my portfolio does not have enough time to show its real value by performing well.
Starting with what I have
No matter what my pension ambitions may be, my approach to building up a SIPP would involve two key considerations. How much would be enough to help me try and achieve my investing ambitions, and how much could I afford?
After all, I want to build a sizeable SIPP but also need to stay within my means.
In this example, I imagine investing £350 a month into a SIPP. That would add up to £4,200 per year. The sooner I start, the more years of contributions would be working for me by the time it comes to retire.
Setting an investment strategy
With time on my side, I could take a long-term view. Part of that would involve considering what investment strategy might suit my personal circumstances best. That involves how much I invest. But it also includes my risk tolerance.
People have their own risk tolerance – and investing beyond my personal tolerance could cause me problems. Based on how much I was able to invest and my risk tolerance, I could make choices about what sort of shares to buy.
Growth and income
For example, I might choose shares I thought had strong growth prospects, like Alphabet, or ones that appeal to me primarily because of their dividend. The 9.7%-yielding British American Tobacco is an example of such a share I own in my SIPP.
I tend to buy shares in individual companies. But when investing my SIPP, I sometimes also consider buying shares in investment trusts like City of London. Different trusts might offer me a mixture of growth and income prospects, as well as helping to keep my pension diversified.
Focusing on long-term wealth building
Diversification is an important risk management strategy. Over the long term, I am almost bound to be disappointed by at some of the shares I choose for my SIPP. Hopefully though, any such disappointments could be more than balanced by making other choices that turn out to be highly rewarding.
But while I keep my SIPP diversified, that does not mean I would invest it in dozens and dozens of different shares.
Instead, I would aim to focus on buying only into what I see as great companies at attractive prices.
Taking time to find such shares – including ruling out a lot of options because they do not match my investment criteria – could turn out to be very financially rewarding for me.
