With the end of the tax year just months away, the deadline to capitalise on the Self invested Personal Pension (SIPP) tax relief is fast approaching. Each year, investors can allocate up to £60,000 from their income into this special pension account. And while most don’t maximise this allowance, failing to use as much of it as possible results in permanent avoidable tax losses.
As a quick reminder, whenever putting part of a salary into a SIPP, the tax paid on that income is refunded. Someone on the 20% basic tax rate can get a 20% relief, while others on a higher rate can receive up to 40%, and so on.
Assuming an investor is in the first category, that means for every £10,000 they deposit into their SIPP, they’ll have £12,000 to invest with. And thanks to compounding, that can make an enormous difference in the long run.
So how can investors find the best opportunities right now? Let’s explore.
Be wary of popular stocks
A tactic that many newer investors use is to look at lists like Hargreaves Lansdown’s ‘Top of the Stocks’ to see what everyone else is buying. But in practice, this can lead to some fairly lacklustre results. It could even end up destroying wealth. Why? Because all too often, popular investments aren’t necessarily good investments.
Lloyds Banking Group is a perfect example. As one of the largest banks in the UK, it can act as a source of stability and passive income. Yet, over the last five years, even when including dividends, shareholders have lost money. And when zooming out further, the results get even worse.
Vodafone is another example, as are easyJet and Petrofac, all of which are in the top 10 most popular stocks, according to this list.
Of course, past performance isn’t an indicator of future results. And there are always exceptions. Rolls-Royce is currently number one in terms of popularity, and it’s hardly difficult to see why. Shares are up more than 200% in the last 12 months as new leadership put the engineering giant back on track after years of mismanagement.
Finding winning investments
For investors simply looking to match the performance of a benchmark like the FTSE 100, investing in a low-cost index fund is likely the most sensible move. Index investing requires little effort and, over long periods, can yield fantastic results.
Stock picking enters the picture for those seeking market-beating returns to try and accelerate and improve their nest egg. This approach is far more demanding both in terms of knowledge requirements and temperament.
A custom-built portfolio, especially one consisting of growth stocks, can be far more volatile than an index fund. And keeping a cool head during turbulent times is far easier said than done. But let’s assume someone has mastered their risk tolerance. Where can the best investment be found?
One of the best places I’ve found is among the companies that seemingly no one is paying attention to. In other words, it’s the unpopular stocks that could make investors rich.
While many of these may be unpopular for a good reason, a few with tremendous potential could simply be getting overlooked. And snapping up top-notch shares at a cheap price is the ultimate recipe for building wealth in the stock market.
