A self-invested personal pension (SIPP) can be an excellent way to build more wealth to support my retirement.
However, there are a few common mistakes that I’m very keen to avoid. Here are three of them.
Overtrading
The first is buying and selling shares too often in this account (i.e. overtrading). This can quickly lead to spiralling charges, which would likely erode my long-term returns.
I invest every month in my Stocks and Shares ISA, but I rarely make large purchases for my SIPP portfolio. My holding period for a stock is at least five years, ideally longer. Therefore, buying and selling a lot in my SIPP makes no sense.
My aim is to find some big winners and compound my returns over many years. Interrupting this process by overtrading is counter-productive.
As the late Charlie Munger famously said: “The first rule of compounding: Never interrupt it unnecessarily“.
Selling far too soon
Next, imagine an investor back in early 2010 thought that streaming content online was the future. So they bought shares in an up-and-coming streaming leader called Netflix.
However, after just one year, the value of their holding had more than trebled (a true story!). The stock’s price-to-earnings (P/E) ratio was 70 (also true). According to mainstream financial media, that made the stock ‘overvalued’.
So, while still thinking that streaming was the future and that Netflix was pioneering it, our investor dumped the stock. Let’s assume they invested £1,000 and sold the shares for £3,100. A great return.
However, as is probably obvious, this investor would have left huge gains on the table. Since early 2010, Netflix stock is up 13,450%! By selling far too early, they missed out on more than £130,000 (discounting currency moves).
Obsessing about valuation
The final related mistake I’m keen to avoid is worrying about overvaluation, specifically the P/E multiple.
This ratio is almost entirely useless when evaluating fast-growing businesses in the process of disrupting large established industries (television, in Netflix’s case). It is more appropriate for mature companies optimised for bottom-line profits (earnings).
I’ve never owned Netflix shares, meaning this cherry-picked example is entirely hypothetical. But it still applies to my own SIPP portfolio because I have a handful of growth stocks that have gone up a lot and appear to be conventionally overvalued.
For example, I invested in The Trade Desk (NASDAQ: TTD) at a much lower share price in 2018. The company’s data-powered platform enables major brands and ad agencies to plan, manage, and optimise digital ad campaigns across multiple channels. The fastest-growing areas are connected TV and ad-driven streaming.
The share price is up 325% in the past five years.
This puts the stock on a forward P/E ratio of 89. The main risk with this high valuation is a downturn in the digital ad space, as happened in 2022 when the stock dropped 50%.
However, I’m willing to ride out such downturns and overlook the high valuation because I think the company’s best days are still ahead of it. Net income more than doubled over the first nine months of 2024.
In future, I fully expect data-driven digital advertising to become the norm. As a global ad-tech leader with a smart founder at the helm, I see The Trade Desk’s platform becoming even larger.
This post was originally published on Motley Fool
