How I’d use a stock market correction to retire early

Our writer thinks a market correction could help him bring forward his retirement plans. Here he explains why and how.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When share prices go down – as they inevitably do from time to time – a lot of investors make what I think is a big mistake. They worry about the harm the falls might do to their retirement planning at exactly the moment they could be seizing an opportunity to retire sooner. Here is how I would use a stock market correction to try and bring forward my retirement.

Mr Market

Investor Ben Graham suggested that people should not focus on the day-to-day pricing of shares. The stock market, he reckoned, was like someone who offered to buy or sell shares to you each day at a certain price. But, just like a salesman knocking at the door, you don’t have to buy (or sell).

A dramatic fall in the price of a stock I own just reflects how ‘Mr Market’ currently feels about it. But I can choose to do nothing and keep the shares. If I am buying shares with a long-term perspective because I think the business has good future prospects, a fall in the share price should not dramatically change my valuation of the company. Indeed, if Mr Market offers me a lower share price, that could be good news for my portfolio.

Buying cheap shares in quality companies

If I invest in a company I think has good long-term prospects, a share price fall could offer me an opportunity to buy more shares for my retirement portfolio cheaper than before. By increasing my own returns from the company’s performance compared to buying at the higher price, hopefully I could afford to retire earlier.

To illustrate this, consider investment manager M&G. At the start of this year, I already liked its business model and dividend yield of 8.7%. But last week, the M&G share price tumbled amid a stock market correction. The yield at that time rose to 10.2% — but only briefly. The company issued encouraging annual results and the share price recovered.

If I had put £10,000 into M&G shares at the start of this year, and reinvested my dividends each year, after 25 years I should have earned around £77,300 of dividends. But if I bought my shares last Monday when they yielded 10.2%, I would expect to hit that target three years earlier. The difference between 8.7% and 10.2% may sound small. But the power of long-term compounding means buying shares I already want to own in a stock market correction could help me retire years early.

Handling a stock market correction in reality

My example above presumes that M&G holds its dividend flat. Its policy is to do so, or even to increase it, but that is never guaranteed. Over decades, all manner of unforeseen problems could cause the business to cut its dividend. I also ignore the impact of any change in the M&G share price in my example and how it could decline further after I have bought it.

Still, I think the example helps illustrate how using a market correction to load up on shares I already find attractive can significantly improve my long-term returns and help bring retirement closer. I would choose a diversified portfolio of shares and be ready to act when I see quality shares on sale.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in M&G. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 penny stocks I’d love to buy for my Xmas stocking!

I'm hoping to buy these top penny stocks when I next have the opportunity. I think they could be some…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now

The FTSE 250 is showing some attractive numbers and they suggest some cracking value among businesses listed in the index.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is this FTSE 250 TV giant one of the best opportunities on the market right now?

A staple name among UK television lovers, this FTSE 250 stock has fallen substantially. Is it time to buy the…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could this 2.5% yielding penny stock soar in 2024 and beyond?

This penny stock has struggled throughout 2023 but could the new year provide it with a much needed positive momentum…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to buy in December [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Close-up of British bank notes
Investing Articles

With £500 I’d start a passive income portfolio with these UK shares

Owning shares in an established business can be a great source of passive income. And Stephen Wright thinks now is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I’d buy these FTSE 100 and small cap stocks in 2024 to target a second income!

This FTSE share offers a 6% dividend yield and trades on a rock-bottom P/E ratio. Here's why I'll buy it,…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s one excellent FTSE 100 value stock investors should consider buying

Sumayya Mansoor explains why this packaging giant is currently in value stock territory and should be on investors radars.

Read more »