Image Source: Getty Images
Owning a self-investment personal pension (SIPP) is a great way to prepare for retirement.
For many of us, retirement may still seem like a long way to go. But it’s getting closer every day – and taking a long-term approach to the financial planning you need can help you enjoy great benefits.
However, some movements can destroy, rather than create value in SIPP. The three pitfalls investors should be aware of are:
1. There is little cost added
Account management fees, handling fees, transfer fees, paper statement fees… SIPP fees and fees will be added immediately.
That’s even before considering the opportunity costs of some options. For example, one provider may provide interest to another Provence that is lower than its cash balance.
By itself, either of these may appear minor. However, it should be noted that SIPPs can grow for decades before their owners retire, and can last for decades afterwards.
This is a very long-term investment project. Over time, even small, seemingly fees and costs can be eaten in large quantities on the return.
Therefore, choosing the right SIPP provider is a simple but important move for investors to create.
2. Not paying ongoing attention
Another way people lose money is to have good investments, but still pay insufficient attention to how their portfolio works.
Not an investor speculator, I am generally not a fan of regular trading.
But that doesn’t mean you’ve bought a share. It’s not just a ship to push it away and forget it.
From geopolitical risks to technological advances, investment cases can change for a variety of reasons.
No matter how good an investment might seem when making it, it makes sense to take a look at it from time to time and think about whether something fundamentally changed means that no longer deserves a place of ship (or conversely, it deserves a bigger place than before).
3. Pay too much attention to dividends
Another mistake SIPP investors can make is to pay too much attention to dividends.
The dividends are great, but they are never guaranteed to last. They should also weigh against capital gains or losses.
That helps explain why I’m a gas well operator and don’t own any stocks Diverse energy (LSE:DEC).
That 10.3% dividend yield certainly draws attention. Incredibly (but that) it is actually modest in relation to some of its historical yields!
But what do you guess?
For over five years, diverse energy stock prices have collapsed 64%. So, investors who bought it for SIPP in March 2020 are now sitting in a massive pile of dividends, but also have much less stock holdings than they paid.
Diversified’s business model has risks. Buying lots of old wells from other companies has bloated their balance sheet borrowing. Large cleanup costs also pose the risk that wells can benefit from productive living.
The business model is innovative and generates many juicy dividends for shareholders, but we have seen companies reduce their payments.
But dividends are always just part of the story. Focused by savvy SIPP investors total Returns from holdings.