The word ‘crash’ often creates a sense of alarm or outright panic. But I think a stock market crash can create a rare opportunity to help me improve my investment returns. That could even help me retire early. Here is how.
Building a share portfolio for retirement
The link between shares and retirement is the opportunity I have to create a retirement nest egg by building up a portfolio of shares. The sooner I start, the longer I have to benefit from any increase in share prices, as well as dividends. That said, share prices can go down as well as up and dividends are never guaranteed. This is why I diversify my retirement portfolio across a variety of shares and business areas.
Whether I want to have a large lump sum of capital, ongoing income streams or both, building a share portfolio could hopefully help me achieve my goals.
Quality on sale
I would focus on high-quality companies. With a long-term perspective on retirement that could still be decades away, I have time to reap the rewards of investing in great companies. So in my retirement portfolio, I would go for a mixture of well-established companies paying attractive dividends and also growth shares. In this example, I will focus on income shares I would consider, such as British American Tobacco, ExxonMobil and National Grid.
My view on them is not affected by a market crash – but their share prices may be. That could dramatically change my long-term returns from investing. It depends on me buying in a market crash, when prices are marked down.
Same companies, better value
As an example, let us go back to the market crash of March 2020.
If I bought British American Tobacco, ExxonMobil and National Grid today, they would offer me yields of 6.3%, 4.6% and 4.6% respectively. But in March 2020 I could have bought the same shares at prices that would now yield me 8.2%, 10.6% and 5.7%.
In other words, this trio of shares offer me an average yield of around 5.2%, which I find attractive. But if I had bought the shares in the 2020 market crash, exactly the same investment would now be yielding me an average yield of roughly 8.2%.
Over 25 years, if I invested £1,000 across three shares compounding at 8.2% annually, I would earn £6,173 in dividends. To generate the same dividend income from exactly the same investment compounding at 5.2% annually would take me 39 years. Investing the same money in the same shares during a market crash could help me achieve my retirement investment goals an incredible 14 years earlier.
Using a stock market crash to my advantage
That is just an example. All three companies could cut their dividends in future. Indeed, the longer one’s perspective the more likely there are to be surprises when it comes to dividends.
But the principle holds. I could bring my retirement forward without changing a single thing about my investing, except for timing. Simply by buying in a market crash, my money could work much harder for me. I generally do not try to time the market. But if a market crash offers me high-quality companies on sale, I will fill my boots — and hope to put my feet up sooner.
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Christopher Ruane owns shares in British American Tobacco and ExxonMobil. The Motley Fool UK has recommended British American Tobacco. 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.
