Whenever the stock market hits a particularly bumpy patch – as it does from time to time – some investors will start nervously eyeing their pension investments, fearful of crashing value.
In fact, though, stock market turbulence can be a potential blessing for the far-sighted investor who still has years to go before retiring.
Recent stock market volatility has not reached the level of being a crash. But, if the market volatility does get even worse, it could reward an investor to be ready to make the most of the opportunities presented. Here is how they might go about that.
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Ignoring the noise but seizing the opportunities
Falling share prices need not affect an investor at all unless they sell the shares. Otherwise, even large-seeming losses are only paper losses. A share may recover in the years or decades before its owner retires.
But what those falling share prices can potentially offer is an opportunity for an investor to buy into great quality companies at a much more attractive price than they had otherwise enjoyed.
That can help build the value of a retirement portfolio in a couple of ways.
The obvious one is that there could be a sizeable capital gain, if someone buys an excellent share at a cheap valuation and over the years it gains substantially in value.
A second dimension is dividend yield.
The yield you earn from a share depends on the price you pay for it, as well as the size of the dividend per share. If you pay £10 for a share with a 50p dividend, your yield is 5%. But if you buy the same share for £5, the yield will be 10%.
Over the course of years, let alone decades, even small seeming differences in yield can create the sort of additional wealth that would enable an investor to retire early.
Looking for value not value traps
Not all shares that crash in price are bargains. Some may look cheap but in fact not be, because their business prospects are much diminished. In other words, they could be what are known as value traps.
But some shares do offer great value during market volatility. Take FTSE 100 asset manager M&G (LSE: MNG) as an example.
At a low point in the stock market crash of March 2020, the M&G share price was around £1.10. Although the price has fallen during recent market volatility, it is still 75% above that March 2020 low.
That is exciting in terms of capital gain. But it also means that, while the current yield is 10.4%, someone who bought M&G shares for their pension portfolio in March 2020 would now be earning a yield of around 18%.
For a FTSE 100 blue chip, that is exceptional.
There are risks to M&G. It has been struggling to persuade policyholders to pay more in than they take out and that poses a risk both to revenues and profits.
But with its large customer base and well-established brand, I see it as a share to consider even now. If market turbulence pushes the price down dramatically again as it did in 2020, it could become even more potentially lucrative.
I am making a wish list of quality shares now for when the next crash comes, just in case it happens suddenly.
