I like the fact that investing in a SIPP allows for a long-term perspective. As a long-term investor myself, that ties in neatly to my own worldview.
When choosing shares to buy for my SIPP, here is a trio of things I typically take into account.
Discontinuous shifts in customer demand
From one year to the next it is relatively straightforward to try and forecast demand for a given industry or company. Yes, there can be external shocks. But in general I think such estimation tends not to be too difficult.
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Fast-forward a decade, let alone two or three, and things can become a lot less clear. Many of the biggest companies in the world today did not even exist three decades ago, or were tiny.
Given the long-term nature of a SIPP, I weigh such potential demand shifts when looking at the investment case for a share. That could be because it operates in a market I expect to see benefit from exploding demand – or one I think may collapse.
Always staying balanced
One company that did exist three decades ago is Apple (NASDAQ: AAPL).
It shows the reason I am a believer in long-term investing. If I had invested in Apple three decades ago, in 1994, my investment would now be worth over 77,000% more – even ignoring dividends I would have received along the way.
Is that because Apple was unknown then?
No.
The second-highest grossing film globally in 1994 was Forrest Gump, in which the titular character marvels over the incredible returns he had made thanks to having money invested in… Apple.
Talk about hiding in plain sight!
But the problem with such incredible success – and frankly it is a problem I would be happy to have to wrestle with for my own SIPP – is how to stay diversified.
Warren Buffett started buying Apple stock under a decade ago, but the success of the phone and computer maker and its soaring share price means it came to occupy an outsized portion of his portfolio.
That is bad for diversification.
All shares carry risks. Apple has been a runaway success, but faces risks including a potential tariff war and also antitrust concerns about the dominance of its app store. Over the long run, staying diversified can mean trimming the role of winners in one’s portfolio.
The power of compounding
When buying dividend shares for my SIPP, I consider their long-term price prospects, but also what I expect to happen to the dividends.
After all, big dividends can lead to massive long-term wealth building when they are compounded. In my view, a SIPP that anyway does not let me withdraw money for a set period of time is an ideal vehicle for compounding.
If invest £1,000 today and compound at, say, 8% annually, after 30 years I will have grown the value of my investment over tenfold.
