Many people use shares to help them prepare for retirement. So a stock market fall that reduces the paper value of one’s retirement portfolio can seem alarming. But in fact, I see it as an opportunity that might help me meet my investment planning goals sooner. Here is why.
What is a stock market fall?
First I think it is helpful to know what a stock market fall is – and what it is not.
Normally when people talk about a stock market fall, they mean the value of an index such as the FTSE 100 has moved lower, or perhaps the total of all shares on the stock market. But that does not mean that all shares have fallen. Even in a brutal stock market fall, usually some shares will plummet, others will move down less dramatically, and some will basically be flat or move up.
What a stock market fall does not do is force me to sell my holdings. So, on paper, my portfolio may be worth less than before. But if I do not sell my shares, I still own what I owned before the fall. If I hang onto my portfolio and the stock market recovers, my paper loss may disappear.
Buying opportunity
What a stock market fall does let me do is buy shares in companies I want to own at cheaper prices than before. Often when market sentiment changes, a lot of companies will have their share prices marked down more than a rational analysis of their business outlook may justify.
For example, boohoo shares have fallen 80% in the past year. Is boohoo a worse business now than it was then? In some ways I think it is – inflation is eating into profit margins and a looming recession means clothes shoppers may spend less. But are boohoo’s business prospects 80% worse than they were 12 months back? I do not think so. That is why I have been buying the retailer for my portfolio.
When thinking about retirement planning, I think the opportunity can be illustrated clearly when it comes to dividend shares. I like the long-term competitive advantage of polymer maker Victrex. But its shares have fallen 36% in the past year. What that means is that its dividend yield has increased.
If I invested £10,000 in the shares today and reinvested dividends each year, after 25 years my holding should be worth around £25,183. If I had done the same one year ago, it would take me 35 years to see the same growth in my holdings.
I am presuming that dividends and share prices will remain constant in this example. But it shows how compounding works faster if I can lower my initial purchase price.
Retiring early
That sort of approach might help me hit my investment targets a decade earlier. That could help me retire early.
Note that I would not be changing my risk tolerance or investment strategy. I would still be focussed on buying the same sorts of companies for my retirement portfolio – ones I thought had a sustainable competitive advantage and strong future earnings potential.
But simply by using a stock market fall to my advantage and seizing it as a buying opportunity, I could try to hit my investment goals much sooner.