I’d add £500 a month to a SIPP to capitalise on the next bull market!

Buying discounted stocks before the next bull market could propel a SIPP into millionaire territory. Zaven Boyrazian explains how.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Cheerful young businesspeople with laptop working in office

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Self-Invested Person Penson, or SIPP, is arguably one of the best ways for British investors to build up a pension pot. Apart from receiving bonus tax relief on each deposit, all capital gains and dividend taxes are completely eliminated.

In other words, investors end up with more capital than they put in, and HMRC doesn’t get to interrupt the compounding process. And with shares still trading at a discounted valuation thanks to the recent market correction, using this tax-efficient account could lead to vast amounts of wealth in the long run. Even more so today, considering the next bull market might have already started!

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Making money

Since the end of October, the FTSE 250 has shot up by over 15%. If it continues to climb by just a further 5%, then a technical bull market would have kicked off. And assuming this upward momentum is maintained, snapping up top-notch shares while they’re cheap could be exceptionally lucrative.

Under normalised market conditions, the UK’s flagship growth index has historically generated an average annualised return of 11%. That’s certainly not been without quite a bit of volatility along the way. But this rate of return is all it takes to potentially make over a million pounds.

Don’t forget the tax relief offered by a SIPP automatically tops up each capital injection. And if an investor is paying the Basic Rate on income, that’s a 20% relief, turning £500 into £600. Investing £600 each month at 11% for 30 years translates into a portfolio worth £1.7m!

However, as previously mentioned, plenty of shares on the London Stock Exchange continue to trade at cheap-looking valuations.

In some cases, these discounts may be well deserved as a previously thriving enterprise may be struggling to adapt to a higher interest rate environment. But in others, capitalising on today’s buying opportunities could be the key to unlocking superior returns. And even if it’s just an extra 1%, that’s enough to add another £400,000 to a nest egg.

Investing for the next boom

With so many discounted stocks to choose from, investors are spoilt for choice. It’s not often that such an opportunity presents itself. And it could be a long time before it happens again. Therefore, it’s paramount for investors to make the right moves.

At the top of the list is getting used to the idea of volatility. Just because things have been going well in the last few weeks doesn’t mean this trend will continue. There are undoubtedly going to be periods of pullback during this recovery, and it’s critical not to get spooked by the wrong reasons.

Similarly, it’s important to realise that while economic conditions are improving, we’re not out of the woods yet. And there remains the chance for some businesses to struggle, especially if inflation were to suddenly start moving in the wrong direction again. Therefore, diversification is likely a prudent approach when taking advantage of seemingly attractive buying opportunities.

However, above all else, it’s important not to get carried away by expectations. Even when investing with an index fund, there’s no guarantee that indexes like the FTSE 250 will continue to deliver the same historical gains moving forward. As such, a portfolio may fall short of expectations, especially if another poorly timed crash or correction comes along.

Yet, frustrating as these are to endure, adding top-notch bargains to a SIPP could be the key to unlocking a far more luxurious retirement.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »