The word ‘crash’ frequently conjures up feelings of terror in investors. However, I believe that a stock market meltdown may provide a once-in-a-lifetime opportunity to assist me in boosting my investment results. It could even allow me to retire sooner. Here’s how.
Building a share portfolio for retirement
Accumulating a portfolio of stocks and bonds significantly increases my chances of building a retirement nest egg. Any capital I invest has the chance to grow exponentially over the next 10, 15 or 20 years. However, stock values can go up and down, and dividends are never guaranteed. This is why I’m spreading my retirement portfolio across a wide range of companies and industries.
Great companies on sale
Firstly, I’m concentrating on high-quality businesses. No small-cap start-ups for me. Larger firms may not grow as fast, but they are more stable. Plus, I have time on my side. Retirement is still decades away and with the longer-term view I have, the more I’m likely to benefit. So, in my retirement portfolio, I’d invest in a combination of long-established firms that offer good dividends, as well as growth stocks. In this example, I’ll concentrate on an income stock like British American Tobacco (LSE: BATS).
While stock values may be down during a crash, the underlying business remains more or less the same. Provided the company does not have a lot of debt and it can maintain (or even increase) sales during volatile times, then I don’t need to worry about investing in them. Warren Buffet would tell me to buy more shares!
Better dividend value
Let’s look at the March 2020 market meltdown as an example.
Shares in British American Tobacco currently trade for 3,162p and generate a staggering dividend yield of 10.28%. However, in March 2020, I could have purchased these identical shares for just over 2,500p. Not only would my portfolio have gone up in value by more than 20%, but the additional shares I would have been able to afford would now be earning me an insane yield.
It’s always good to remember that dividends are not fixed values. They can go up and down, or a company could choose to not pay one at all. But the difference of a few percentage points in yield can take years off of a retirement goal.
If I invested £1,000 at an annual compounding rate of 8.2% for 25 years, I would potentially receive £6,173 in dividends. It would take me 39 years to earn the same amount of dividend income from the same investment compounding at 5.2% yearly.
Using a market crash to my advantage
These numbers are only to illustrate a point.
However, the principal remains the same. Through buying when the market is down, I could move my retirement forward without changing anything else about my investments. My money might work considerably harder for me if I bought during a market crisis. I don’t try to time the market very often. However, if a market crisis results in high-quality enterprises trading at sale prices, I will fill my boots — and hope to be able to put my feet up sooner.
The post I want to retire early Here’s how a market crash could help me do just that appeared first on The Motley Fool UK.
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James Reynolds has no position in any of the shares mentioned. 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.
