A senior group of friends enjoying rowing on the River Derwent
A self-invested personal pension (SIPP) is a DIY pension. For me, it has many benefits, such as giving me a sense of control over my financial future. But the main one is that it fosters a long-term investing mindset.
The reason that is so is because I can’t withdraw money from my SIPP until I reach the age of 55 (57 from 2028). For those under 30 today, that might end up being 60 or beyond.
Therefore, a SIPP is ideal for allowing compounding to work its magic over time. In other words, because I can’t access the money for, say, a nice but unnecessary holiday in the Caribbean, the pot is left undisturbed.
Interest can then build upon interest, fueling the wealth-building process. As Warren Buffett’s right-hand man, the late Charlie Munger, once said: “The first rule of compounding: Never interrupt it unnecessarily.”
One index at a time
Most SIPP providers enable investments in a wide variety of funds, shares, and bonds. In fact, the choice can be overwhelming at first.
One way to overcome this though could be to focus on one UK index at a time.
For example, I could focus on the FTSE 100, which would narrow my choices down to 100 stocks rather than the thousands of funds and shares available.
So what might be a great Footsie share to buy to start off my SIPP portfolio?
Top hotel franchiser
Right now, a stock that has captured my attention is InterContinental Hotels Group (LSE: IHG).
The company owns brands like InterContinental, Holiday Inn, and Crowne Plaza. However, what I like here is the business model it operates, which mainly centres around franchising and management contracts.
IHG licences its brands to third-party operators, who pay it fees and ongoing royalties based on revenue. This means the company has lower operating requirements and better profit margins.
These are the sort of business qualities that make for winning investments over time. The stock has returned 181% in a decade (not including cash dividends).
Looking ahead, I’m optimistic about its competitive edge due to its broad portfolio of brands ranging from luxury (Regent Hotels & Resorts) to budget (Holiday Inn). India is a huge potential growth market for IHG.
Admittedly, the stock isn’t cheap, trading at 23 times this year’s forecast earnings. That’s more than your average FTSE 100 share, which adds valuation risk.
However, I think IHG stock has all the ingredients for a winning stock long term.
Pattern recognition
Returning to our theme, is it realistic to aim for a £1m+ SIPP portfolio?
Well, it would depend on my age, returns, and how much I invest. But let’s assume I’m 30, giving me around a three-decade investing period, and I put £750 every month into stocks inside my SIPP.
In this scenario, I would end up with £1,056,932 (£1.05m) after 30 years if I achieved an average 8% return.
While that rate of return isn’t guaranteed, I do think it is achievable. That’s because a big part of successful investing (beyond patience and a bit of luck) comes down to pattern recognition.
That is, identifying winning (and losing) stock traits, a bit like how a football scout spots promising talent. And this skill should improve as investing experience builds, possibly leading to even higher returns.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended InterContinental Hotels Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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