Investing in a Self-Invested Personal Pension (SIPP) is one of the best ways to build retirement wealth. Apart from being able to tap into the lucrative gains of the stock market, SIPPs provide invaluable tax relief.
Of course, as with every investing account, the challenge is knowing where to invest capital to ensure a chunky pension pot in the future. With that in mind, let’s explore how I’d go about investing my first £1,000 of a retirement portfolio.
Starting a portfolio with £1,000
The tax advantages of a SIPP are incredibly powerful. Even for those paying the Basic rate of income tax, that’s a 20% tax relief bonus. In other words, £1,000 after tax relief becomes £1,250, immediately providing a greater chunk of capital to build a SIPP portfolio.
For those intending to just mimic the stock market, allocating this capital to an FTSE 100 or S&P 500 index tracker‘s likely a prudent move. After all, it puts portfolio management on autopilot and ensures instant diversification. However, for those who want to take complete control and seek higher returns, stock picking’s likely more suitable.
Sadly, £1,250 isn’t enough to build a diversified portfolio of 20 stocks. That’s because trading fees can quickly gobble up capital. For example, assuming a broker charges £10 a trade, a £1,250 portfolio will need to generate a 19% return before it can break even.
Therefore, instead of aiming for instant diversification on day one, I’d aim to slowly diversify over time with future capital injections and concentrate my initial £1,250 into one or two stocks at most.
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.
Picking a winning first stock
Portfolio concentration minimises trading fees and also increases the wealth-building impact of winning stocks. Unfortunately, the opposite’s also true. If a stock underperforms, a SIPP may yield disappointing results. This concentration risk will naturally decline as more capital’s added to my SIPP in the future. But nevertheless, it makes the first few stock picks critical.
So what stock would I buy first? For my SIPP, one of my first investments was Games Workshop (LSE:GAW). The tabletop miniature manufacturer may sound like an odd choice at first glance. But it’s an enterprise that’s cultivating enormous pricing power and a cult-like following from its core audience.
So much so that revenue has been growing at an average pace of 18% a year over the last five years with earnings climbing even faster at 23%, thanks to margin expansion. This has translated into superb long-term share price performance as well as an ever-increasing dividend.
The company isn’t risk-free by any means. At-home 3D printing’s quickly rising in popularity, which may undercut management’s long-term pricing power. Nevertheless, with its flagship Warhammer IP rising in popularity through video games and TV projects, demand doesn’t look like it’s going to be in short supply any time soon.
This post was originally published on Motley Fool
