Markets have been moving around lately, and many investors are nervous about what might come next. But falling share prices are not always bad news. In fact, a stock market correction could help bring forward your retirement by years – depending on how you respond to it.
What happens when the market falls?
If I bought a car and it sat in my driveway year after year, I probably would not think much about its resale price. I would not check car websites every day to see whether the latest selling prices had moved. If I had no intention of selling the car, the latest sale price would not bother me. I would still have the same vehicle I paid for, regardless of what had happened to the price since I bought it.
But for some reason, many investors think of share prices differently. Yet the process is the same. Share prices rising or falling are essentially just an offer from other people to buy or sell shares. I can keep the shares I own. Even if the price has gone down, I do not make a loss unless I actually sell them. Stock market volatility may reduce or increase the paper value of my investments. But my portfolio itself is the same, unless I make a trade.
Is a stock market correction a buying opportunity?
However, sometimes a stock market fall can be a buying opportunity.
Take JD Sports as an example. I hold the clothing retailer in my portfolio and think its profitable retail formula could help the company do well in future. Yesterday’s results showed that the company made record profits last year — and expects a similar performance this year. Although the shares moved up in response, they are still 36% lower than a year ago.
Is that a buying opportunity for my portfolio or a sign I should sell? It could turn out to be either. But when I think a company still has a strong investment case yet its share price has tumbled, often I think it can make sense to buy more shares for my portfolio.
Increasing yield
That approach can help me meet my retirement goals sooner. A good example is income shares. Right now, British American Tobacco has a dividend yield of 6.3%. But the share price has risen 25% over the past year. That means if I had bought the same shares a year ago, I would now be earning an 8.4% yield because of my lower purchase price.
If I bought the shares today and reinvested the dividends each year, compounding would mean that after 20 years my investment should be worth around £3,514. But if I had bought a year ago at the lower price and followed the same approach, I could reach the same value four years sooner.
This example presumes share prices and dividends remain stable. But the principle is clear: buying the same shares I would anyway when a falling stock market pushes their value down could help me meet my retirement goals much earlier. That is why I keep a watchlist of shares I am keen to own. That way, I am ready to move if a stock market correction pushes their prices to a very attractive level.