Investment freedom is one of the great attractions that a Sipp offers. Being able to buy individual shares, commodities and commercial property of your own choosing can lead to superior performance and a greater income in retirement. But having made the decision to pay extra for the freedom of a Sipp, the real challenge is to use it properly. This means taking a consistent and disciplined approach to your investments.
Having a long-term game-plan is therefore crucial to successful Sipp investment. This should always begin with an investment policy statement (IPS). This document should guide and control your investment decision-making. It sets out your aims, your tools for achieving those aims, your circumstances, and the limitations on what you can do to achieve your goals. An adviser will usually construct one for you at the outset, but you should still have one even if you're not taking much or any formal advice.
Establish risk and return objectives
The first step in developing your IPS is to work out exactly what your goals are. This sounds obvious, but many people never actually bother to sit down and work out how much they will need in retirement. Simply saying that your aim is to amass as much as possible is not adequate here. Putting a figure on how much you will need to live on later on and how much you can afford to save in the meantime will enable you to reach an annual total returns requirement.
What sort of returns you need dictates how much risk you have to assume. If you've started your Sipp late and with relatively small assets, your need for high returns will necessitate a greater allocation to risky assets if you're to reach your goals. The paradox is that the later your stage of life, the less risk you should be taking. Being largely invested in equities with three years to go before retirement can shrink your pension pot disastrously if the market crashes.
Develop your asset-allocation approach
Once you've established suitable risk and return objectives, your strategic asset-allocation approach can be developed. The academic research is clear on this point: asset allocation is responsible for the lion's share of a portfolio's returns over time. Other factors - such as timing - play only a minor part in the process at best.
"There's a growing awareness of the importance of asset allocation,"says Salim Sebbata, director of E*TRADE's UK retail brokerage arm. "But private investors still aren't taking it as seriously as they should. You constantly see people trading on stories and following the latest fads, rather than doing analysis of the broader picture and then working down through asset classes to individual investments."
So you need to make a dispassionate decision on asset allocation given your risk and reward criteria. Here, there is no one-size-fits-all solution. The main issues are what proportion of your total funds should go into risky assets, and how you should split them. In the case of equities, this means choosing between various international markets, investment styles and company sizes. For suggestions of model portfolios, see our feature on .
Sticking to your game-plan
Sticking to the investment game-plan over time requires regular monitoring and adjustment. The performance of the various asset classes will naturally change the portfolio's make up. A cracking run for commodities, say, could increase their weighting from 5 per cent to 10 per cent. But, when an asset class or an investment is doing well, there's a temptation to ride this success and allow the weighting to stay above what your model suggested.
"There's sometimes a good case for restoring your allocation to original target levels," says Justin Modray, head of communications at adviser Bestinvest. "Consider trimming some of the gains from hot asset classes after a great couple of years and putting them elsewhere. If you don't rebalance manually in this way, the market may well end up doing it for you."
But, as important as it is to adjust your portfolio to reflect changing circumstances, you also need to be wary of doing too much. "Trading too aggressively is a very common mistake," says E*TRADE's Salim Sebbata. "This is particularly true for investors who are forever buying into the darlings of the day. As well as taking care not to overtrade, it can pay to take a step back and consider buying some currently unloved investments. A reasonable blend of value and growth is advisable."
Once you've made your decisions, contributing as much as you can afford, as often as possible, is then a key part of building up your Sipp. The annual tax benefits are potentially huge, so it makes sense to use them.
"It's really critical to make regular contributions," says Mr Sebbata. "It's all very well putting in a lump sum at the beginning and relying on the long-term performance of the stock market to grow it. But really the aim should be to turbo-charge your returns by making regular additions to your Sipp portfolio."
Mr Sebbata emphasises the need for proper budgeting, too. "Drawing up a financial plan is essential. We need to work out what we need to live on and then try and commit the remainder as early as possible to our Sipps. It can be hard to do this. The easy thing is to spend £10,000 on booking a holiday, rather than thinking on that sum's possible benefits on your wealth 20 years away."