As a long-term shaeholder, thinking about my Self-Invested Personal Pension (SIPP) chimes perfectly with my ideal timeframe for investing. That has got me thinking about not just specific shares I would like to own in my SIPP, but also the type of shares.
Looking beyond the short term
For example, with decades left until I expect to be drawing down my pension, I would ideally be buying shares now that I think could still merit a place in my SIPP by the time I retire.
Billionaire investor Warren Buffett has said that his favourite holding period is “forever”.
In practice, of course, things may change. So a share I buy today expecting to hold it forever may not actually stay in my SIPP as, over time, my views about it change.
But I do find it helpful to consider the long-term outlook for a business before investing in it. As Buffett has also said: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”.
Dividends and share price growth potential
One mistake I think some investors make when it comes to investing their SIPP is focusing on dividends without also considering share price movements.
Dividends are not all born equal. Some strong businesses continue to grow profits, allowing them to pump out dividends while also benefitting from long-term share price growth. But other shares are more of a zero-sum game, paying out juicy dividends but losing value over time.
One reason can be that a business is not really generating enough free cash flow both to pay its dividends and keep growing, so prioritises the shareholder payout. Therefore, when looking at shares that have attractive dividends, I consider their source and weigh up whether I think they can keep coming without hurting the firm’s growth opportunities.
Sticking to the known
When looking for shares to buy for my SIPP I follow another one of Buffett’s ideas, and stick to what I know and understand.
Each investor has their own circle of competence. That is not fixed – it is possible to decide that an area like renewable energy or defence seems like an interesting investment idea and learn more about it.
But, whatever your particular circle of competence is, sticking to it when investing makes sense, in my view.
For example, I own shares in Diageo (LSE: DGE). As a sometime tippler of Guinness and Lagavulin, among other Diageo products, I feel familiar enough with what the company sells.
Not only that but I reckon I can get to grips with the business model too. It strikes me as fairly simple and there are a few things I like about it, from the pricing power that comes with Diageo’s portfolio of premium brands to the company’s strong profitability.
But Diageo has been facing multiple challenges, leading its share price to fall by a quarter over the past year.
Weak sales in Latin America may be a short-term difficulty so need not concern me much for my SIPP. But what about falling alcohol consumption among younger consumers? That is a longer-term risk to both revenues and profits.
On balance though, I continue to see Diageo shares as an appealing holding for my SIPP.
