Let me begin by saying there is nothing good about a virus spreading through the global population. It is not good to have people sick and dying. Supply chains are being disrupted and a recession is a real possibility. Stock markets around the world are falling because corporate revenues and profits are expected to take a hit. For those close to retirement, their pension pots are taking a hit, which is awful, and I hope they recover soon.
A chance to start big
If you are just starting to plan for a retirement that is decades away, declining share prices could work in your favour. Whatever money you have to start funding your retirement pot will now go much further.
If you have money sitting in a Cash ISA, or savings account, that you want to put into a Self-Invested Personal Pension, it will buy more shares or fund units now than at any time since about 2016. By the time you retire the markets are highly likely to have moved higher, and your initial position will be worth a lot more.
But along the way, because you bought more units or shares at the start, more dividends get paid, which can be used to buy more and more shares and units. When you do come to retire, you will likely own many more units and shares than you started with, worth much more than they would be now.
When it comes to what to buy I would suggest buying index trackers or finding quality stocks. Tracking the FTSE 100 or the FTSE 250 with a fund spreads your risk across all of the individual companies in the index.
What I mean by quality stocks are those with strong balance sheets, competitive advantages, and stable revenues. Think of the big pharmaceutical companies or consumer giants like Unilever. Companies with large, diverse supply chains are better suited to deal with the current situation. Healthcare budgets remain fairly stable during crises, and well-known brands support revenues. Strong, low-debt balance sheets mean interest payments are made even when revenues fall.
Dividends are usually paid by quality stocks, and index trackers. If a retiree has a large number of dividend-paying shares or units of an index tracker that pays out dividends, then market crashes should not bother them as much. So long as dividends are not being cut, then the income will continue to flow to fund retirement spending. Quality stocks are less likely to see their dividends cut and dividend yields should not disappear on entire indexes.
But don’t try to buy dips
What I am suggesting is that for those that have been thinking of saving for retirement, but have held off, now might be the time to finally commit. I am not suggesting that the best way to invest is to always wait for the market to crash.
If you are planning to make regular contributions, or are wondering whether or not to keep contributing right now, then my advice is to keep investing whatever happens. Predicting market dips is difficult, and trying to buy them probably does worse than regular investing.
The post This market crash might be good for your pension if you are just getting started appeared first on The Motley Fool UK.
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James J. McCombie owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. 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.
Motley Fool UK 2020