Ever worried about what the impact of a stock market crash might have on your retirement income? What if you end up buying an annuity when the market is badly down?
Such concerns are understandable – a crash can be a scary thing. In reality though, a stock market crash may actually be brilliant news for someone looking ahead to their retirement and hoping to retire early.
An opportunity to buy more for less
That is because of what happens during a market crash. Typically, a large number of shares become available at a much cheaper price (the standard definition of a stock market crash is a fall of at least 20% in short order).
Some of those shares suddenly get cheaper because they were badly overvalued. Or perhaps their future prospects have worsened due to a weakening economy. Some shares that fall during a crash never recover.
But others are shares in blue-chip companies whose long-term prospects ultimately turn out to be largely unchanged. So they might suddenly be available at a terrific price.
Such windows of opportunities can be short-lived, so it pays to be prepared. For example, I see now as the best time to make a list of great companies I would like to invest in, if I could do so at attractive prices.
If I wait to start thinking about that when the next crash comes (whenever that might be) I may not then have enough time to act.
Retire sooner… like this
In practice, taking that proactive approach could mean that somebody hits their retirement goals sooner. For example, HSBC (LSE: HSBA) currently offers a dividend yield of 4.1%. That strikes me as attractive and is well above the FTSE 100 average.
Compounding £10,000 at 4.1% annually, it would take 18 years to double in value. I ought to add that, in practice, share price changes would affect this, not just dividends, but I use this example for the sake of simplicity.
But someone who bought HSBC shares in the dark days of autumn 2020 would since have seen their holding rise 376% in price.
Not only that, but they would now be earning a yield of around 19.5%. Compounding at that rate, £10,000 could be doubled not in 18 years but in just four!
I’m getting ready while I wait
In fairness, there were concerns in 2020 about what lay ahead for banks, including HSBC. The dividend was suspended.
I do not plan to buy the share now, partly for similar reasons. I have concerns about what the risk a weakening global economic outlook could have for bank profits.
HSBC’s heavy Hong Kong exposure means that global trade flows can ultimately have a significant impact on its business.
After the share’s stunning rise in recent years, I do not feel the current price offers me sufficient margin of safety for that risk. That is despite HSBC’s proven model, strong profitability today and large customer base.
But the point is clear. Being prepared to swoop in and grab blue-chip bargains during a stock market crash can help someone achieve their retirement financial goals years or even decades early.
