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A SIPP is a long-term investment vehicle – and that can help make it a very rewarding one.
By choosing the right shares along the way and letting the power of long-term investing work its magic, I can hopefully multiply the value of my SIPP many times over.
Here is how I would aim to turn a £20K SIPP into one worth almost 30 times that much.
Why I invest for the long term
To start with, let me explain why I take the long-term approach. With decades until I may want to withdraw funds from my SIPP, I do not feel in a hurry.
If I buy into what I think is a great business at a price I find attractive, hopefully over time the share price could rise to reflect that.
On top of possible share price appreciation, if a business pays dividends to its shareholders, then I might also be paid over years or decades simply for holding my investment.
Doing the maths
Still, even if I benefitted from both share price appreciation and dividend income, how long might it take me to grow the value of my SIPP to almost £600K?
That depends on what those elements add up to on average in each year. That is called the compound annual growth rate of my SIPP.
Imagine I manage 12%. Doing that, after 30 years, my SIPP ought to be worth around £599K. Not bad at all!
Combining growth and income
No FTSE 100 share currently yields 12%.
Even if one did, that would not mean that the dividend would be maintained for three decades. Even the best companies can run into unexpected challenges in that period (though some, such as Spirax and Diageo have actually grown their dividend each year for over three decades).
But dividend income (which I would reinvest along the way in my SIPP) is only one tool in my arsenal. Remember – I am also going for share price growth.
If I can buy into great companies that grow their business enough without overpaying for the shares, I think a compound annual growth rate of 12%, though challenging, is achievable.
Looking for the next Apple
As an example, consider Apple (NASDAQ: AAPL). Its dividend yield is just 0.4%. Over the past five years, though, the Apple share price has grown by 335%. In other words, such a share would have blasted past my target compound annual growth rate of 12%.
I keep my SIPP diversified across different shares and £20K is ample to do that. Shares performing in line with the recent track record of Apple are rare but they do exist.
Why has Apple performed so well?
It has a huge addressable market that is likely to remain that way. Thanks to a strong brand, proprietary technology, a large user base, and service ecosystem, it has strong pricing power. That has helped it achieve mammoth profits.
I would not buy Apple at its current share price, which I think offers me too little margin of safety given risks like growing competition from rivals.
But I would learn from its success as I aim to grow my SIPP value substantially.
