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Owning a Self-Invested Personal Pension (SIPP) can be a lucrative way to prepare for retirement.
For many of us, retirement may still seem a long way off. But it is getting closer every day – and taking a long-term approach to the necessary financial planning can help reap significant benefits.
Some moves can destroy rather than create value in a SIPP, however. Here are three such pitfalls investors should beware of.
1. Little costs can soon add up
Account management fees, commissions, transfer fees, paper statement fees… the costs and charge of a SIPP can soon add up.
That is even before considering the opportunity costs of some choices. For example, one provider may offer lower interest on cash balances than another.
In isolation, any one of these things may seem minor. But bear in mind that a SIPP can stretch for decades before its owner even retires – and can go on for decades afterwards.
This is very much a long-term investing project. Over time, even small seeming fees and costs can eat heavily into returns.
So choosing the right SIPP provider is a simple but important move for an investor to make.
2. Not paying ongoing attention
Another way people lose money — even when making good investments — is paying insufficient attention to how their portfolio is performing.
As an investor not a speculator, I am not generally a fan of regular trading.
But that does not mean that, having bought a share, one ought simply to tuck it away in the SIPP and forget about it.
An investment case can change for a host of reasons, from geopolitical risks to technological advances.
No matter how good an investment may seem when making it, it makes sense to keep an eye on it from time to time and consider whether anything fundamental has changed that may mean it no longer deserves a place in one’s SIPP (or, conversely, deserves a bigger place than before).
3. Paying too much attention to dividends
Another mistake SIPP investors can make is paying too much attention to dividends.
Dividends are great — but are never guaranteed to last. They also have to be weighed against capital gain or loss.
That helps explain why I do not own shares in gas well operator Diversified Energy (LSE: DEC).
Its 10.3% dividend yield is certainly attention-grabbing. Incredibly (but tellingly), that is actually modest in relation to some of its historic yields!
But guess what?
Over five years, the Diversified Energy share price has collapsed by 64%. So, an investor who had bought it for their SIPP in March 2020 would now be sitting on a large pile of dividends – but also a shareholding worth far less than they paid for it.
Diversified’s business model has risks. Buying up lots of old wells from other companies has bloated the borrowing on its balance sheet. It also brings the risk that large cleanup costs as wells end their productive life could eat into profits.
The business model is innovative and has produced lots of juicy dividends for shareholders, even though we have seen the company reduce its payout.
But dividends are always only one part of the story. A savvy SIPP investor focusses on total return from any shareholding.
This story originally appeared on Motley Fool
