A stock market crash can seem like a worrying thing when it comes to pensions. People might look at the valuation of their SIPP during or after a crash and see that it has shrunk dramatically, making it feel as if their retirement goals are moving further away.
In fact, though, a stock market crash can be used to try and help bring such goals closer. Here’s how.
What really happens when the stock market crashes
Looking at a SIPP or ISA valuation covered in red ink it can be easy to think, “ouch! I’ve lost a lot of money”.
But crucially that is just a paper loss unless the shares are sold.
During a stock market crash, the price of many shares can fall sharply. But that does not necessarily mean the underlying value of those businesses has also fallen.
Keep calm and carry on
Although many people know that, it can be hard to bear it in mind in the heat of a crash. Seeing even a paper loss can be difficult to deal with emotionally.
Not only that, but a stock market crash may also reflect factors that do affect the valuation of some companies.
Lloyds shares have more than tripled in five years. But that still leaves them 60% lower than in 2007 before a financial crisis caused big losses for banks including Lloyds, as well as triggering a stock market crash.
Taking a strategic approach to try and retire early
Still, while that can be a fraught environment for an investor to make decisions, it can also be rich with opportunity.
While some shares tumble in a crash and never recover or do so only after decades, others slump and then bounce back fairly fast. Buying them cheap not only offers price gain potential, but it can also make for a juicier dividend yield.
Take M&G (LSE: MNG), for example. Its current dividend yield of 6.5% is already well over twice the FTSE 100 average.
But someone who bought in May 2020 after the pandemic era stock market crisis would now be yielding around 18.5% from the FTSE 100 asset manager.
Not only that, but the M&G share price has grown 185% since that crash.
It could pay an investor to be ready and prepared to jump in after a stock market crash and start buying high-quality shares at rock-bottom prices.
They could potentially massively boost their long-term returns and passive income streams, perhaps helping them retire early by meeting their financial goals sooner.
Preparation is key here!
But such windows of opportunity can be short-lived. Preparation in advance helps an investor be ready to pounce.
M&G is on my watchlist of shares to buy if a stock market crash sends it down to the sort of valuation we saw in 2020.
Asset management is big business. It involves large sums, so even small commissions can add up. The market is likely to endure for decades and is massive – M&G alone has millions of clients, spread across multiple markets worldwide.
A stock market crash could make some of those clients nervous and lead them to withdraw funds, hurting revenues and profits at M&G. As a long-term investor, though, I think the share is worth considering – even more so if the price is much lower than today!
