A lot of people dream of an early retirement. The stock market can help turn that dream into a reality.
That’s because putting money into shares can help build up a portfolio of shares to help fund retirement.
But something a lot of people don’t understand is that that doesn’t necessarily rely on a booming stock market. In fact, a correction or even a crash in the market can help speed the process up.
Lower prices can be scary but helpful
Let’s start by considering what a crash actually is.
Each day it’s open, the stock market quotes you (and everyone else) a price at which it’s willing to sell you a given share. It also quotes you a price at which it’s welling to buy the same share (or any others) from you.
But that’s just an opportunity – not an obligation.
That point’s crucial.
A crash can scare people because they look at their portfolio valuation and suddenly it’s much lower than it was even a few days before. But that’s only a paper loss. As there’s no obligation to sell, there’s no obligation to crystallise that loss.
But there is an opportunity – and potentially a lucrative one for those who want to retire early.
Quality on sale
That opportunity is buying into great businesses at a lower price than it’s normally possible to do.
That can push up dividend yield, as yield’s a function of both a company’s dividend per share and what you pay for that share.
I can illustrate this with a share I bought during the pandemic (and later sold): US oil major ExxonMobil (NYSE: XOM).
With its scale, business efficiency, and worldwide footprint, I think there is a lot to like about ExxonMobil. Even at today’s share price, I see it as a share for long-term investors to consider.
But it was much cheaper a few years back.
ExxonMobil has raised its decade per share annually for many decades. Right now it yields 2.7%. That is below the FTSE 100 yield on this side of the pond, but by US standards it is well over double the current S&P 500 yield.
In 2020, though, the ExxonMobil share price was less than a quarter of where it stands today.
So, someone who bought then would now be yielding over 11%, versus the 2.7% yield on offer to today’s buyer.
That share price fall – and recovery – tells its own story.
A big risk back then was weak oil prices. ExxonMobil kept growing its dividend, but Shell and BP both cut theirs. Oil prices have since risen, but today’s geopolitical uncertainty means they’re still a risk. That could hurt ExxonMobil’s mammoth profitability.
Getting ready now for future opportunities
Buying a share at a lower price and so earning a much higher yield can help an investor hit their retirement goals years early.
Such opportunities don’t come around too often, though – and when they do, they mightn’t last long.
That’s why it can pay to prepare in advance.
Rather than waste time trying to time the next stock market crash, I’m updating my list of shares I’d like to buy if I can do so at an attractive enough price.
