Ever thought about the possibility of knocking years off the date at which you will have the financial means to retire as you choose? But worried that a stock market crash at some point could potentially derail your hope to retire early?
A crash can actually be a brilliant opportunity for investors who are still working but hope to retire early at some point.
Why worry about when the crash is coming?
Let me start by saying that I am not suggesting I expect a stock market crash any time soon.
I can see good arguments for why there may be one, but I also see some solid arguments in the other direction. The reality is that nobody knows with certainty when the market will next crash.
Instead, I think a rational investor can work with what we do know.
We know that the market will crash at some point, even if it is not for years. We also know that, based on past experience, such a crash is likely not only to mark down some overpriced shares but also to push some high-quality ones down to an attractive valuation.
Therein lies the opportunity!
Buying quality on sale
To illustrate, let me use an example from the 2020 stock market crash.
There were lots of unknowns at that point – as is common during a stock market crash.
One of those was what a pandemic and lockdowns might mean for retail operations and also consumers’ willingness to spend on their homes.
In February 2020, homewares retailer Dunelm (LSE: DNLM) hit an all-time high.
That was to prove short-lived: in little over a month, the Dunelm share price lost more than half its value. It then more than doubled again by October of the same year.
That recovery reflected changing investor perceptions about what the pandemic would do for homewares demand.
But it also reflected some of Dunelm’s underlying strengths, such as unique products, a good understanding of its shopper base and a retail strategy that aimed to grow digital sales while maintaining a sizeable shop footprint. Those remain true today — and I see them as attractive.
Boosting yield
Currently, Dunelm yields 5.9%.
The share has a strong track record when it comes to dividends – not only ordinary ones, but special ones too, as a way of distributing excess cash.
Last month, for example, it paid an interim dividend of 17p per share. It also paid a special dividend of 25p per share.
Today the Dunelm share price is actually quite close to where it fell to in 2020. Investors now are worried about risks including what the Middle East conflict may mean for shipping costs, as well as product inflation eating into the firm’s margins.
Someone who bought Dunelm in February 2020 would now be yielding around 3.2%. Someone who bought the same share in the crash the following month would be yielding 6.4%.
Compounding a portfolio at 3.2% annually, it would take 23 years to double in value. At 6.4% it would be 11 years quicker.
That helps illustrate how buying a diversified portfolio of good shares at attractive prices during a crash could help someone retire early.
As it happens, even at today’s price, I see Dunelm as a share for investors to consider now.
Should you invest £5,000 in Dunelm Group Plc right now?
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Christopher Ruane has no position in any of the shares mentioned.
