5 Reasons Our Aging Society Doesn't Mean Stock Market Doom

(from Larry Swedroe's Wise Investing blog at CBS's Moneywatch.com, 9/22/2010 - click here to link to the original post)

A significant part of my time at Buckingham Asset Management is spent calming investors down, assuring them that what they’re concerned about is nothing more than noise meant to grab your attention, but has no basis in reality. The following is a recent example.

After reading an article, a client asked: “If 43 percent of Americans working are going to retire in the next decade, what are they going to live on? Are they going to liquidate their holdings in the stock market and, at a minimum, shift more into bonds? Won’t this restrain market growth more than the historical levels?” Here are five reasons why this type of consternation was unwarranted.

Information Isn’t Wisdom
The first thing I pointed out was that the investor should not confuse information with wisdom (information you can use to produce above benchmark returns). It’s only unanticipated events that move markets, not those that are fully anticipated. Think of it this way: If you know something (like a large segment of the population is nearing retirement), it’s a virtual certainty that other investors also have this knowledge and have acted on it. Thus, the expected impact of equity sales by retirees should already be reflected in today’s prices. It’s only if the level of equity sales is greater than expected should there be a negative impact on future equity prices. And, it’s certainly possible that sales will be less than expected or that there will be an unexpected offsetting increase in demand for equities from other sources. If that’s true, all else equal, equity prices would increase.

Conventional Wisdom Is Often Wrong
A second point I raised was that often what one reads (even if it sounds logical and the arguments are persuasive) may still be wrong — as conventional wisdom often is. One of my favorite sayings is “It ain’t what a man doesn’t know that gets him in trouble, but what he knows for sure, but ain’t so.”

The conventional wisdom about the relationship between age and investment allocations is actually wrong. There’s no evidence that investors dramatically reduce equity exposure as they age. As Jim Davis of Dimensional Fund Advisors pointed out in a 2005 article, the evidence actually suggests that investors “accumulate equity positions during their years of greatest earning power and do not dramatically reduce those positions as they enter retirement.”

Will Everyone Retire as Expected?
I also pointed out that it’s certainly possible that people won’t retire as expected. They may decide to continue working. Many people are now working well into what was considered the retirement years. Extending working years reduces the need to draw on portfolio assets.

It’s Not Just About the United States
I next pointed out that the U.S. equity market isn’t solely dependent on U.S. investors. The rapid growth of sovereign wealth funds and rapidly increasing per capita GNP in developing markets could lead to increased demand for U.S. equities from non-U.S. investors. Thus, it’s quite possible that when a U.S. retiree sells, the buyer will be a young software engineer from India or China. Thus, even if U.S. retirees become large net sellers of equities, it doesn’t mean valuations will be negatively impacted. There might be offsetting increases in demand from other sources.

The Savings Rate Has Been Climbing
In the most recent decade, one of the biggest concerns of policy makers was the very low rate of savings in the U.S., as the rate was so low that it was in danger of dropping below zero. The financial crisis has caused investors to reevaluate their savings patterns. Today, the savings rate is around 6 percent. And in the 1980s, the savings rate was around 10 percent. A rising savings rate could translate into an increased demand for equities.

The bottom line is this: Because today’s market valuation is based on all that is knowable about the future, it’s likely that currently unforeseeable events will have a far greater impact on prices than anticipated demographic shifts. And because what we don’t know is by definition unforecastable, the biggest impact on equity markets will likely come from events that few (if any) even have on their radar screens.

Thus, you’re best served by ignoring market forecasts and focusing on what you can actually control:

- Your risk level
- How well you’re diversified (eliminating or minimizing the diversifiable risks
of single companies, sectors and countries)
- Your costs
- Your tax efficiency

And finally, the fact that future returns are likely to be impacted by events that are not forecastable is why investors have historically demanded a large premium for taking the risks of equities. It’s also why equities are risky no matter how long your investment horizon.

Baby Boomers Retiring - How Will it Affect the U.S. Economy

The Boomer generation is a demographic term for the Americans born somewhere in between 1946-1964. Based on a 2000 United States census, the Baby boomer generation is a population of roughly 83 million. To date, baby boomers range from 42 to 60 years of age. This means that the baby boomer generation is on its way to leave the labor force of the country.

Baby boomers are offsprings of a healthy, erudite and bounty living. Because of this, they have changed the perspective of growing old by reinventing themselves to pursue a new passion.

Because of the distinctive characteristics of baby boomers, they have caught much attention and are the subject of studies and surveys. And for one thing, baby boomers belong to an influential generation that significantly affects the economy of the United States.

In an investigation conducted to discover how baby boomers expect retirement, here are some of the key findings:

• For baby boomers, retirement is an occasion to dedicate themselves to the family and to enjoy their leisure time by pursuing their interests and hobbies. Anyway, they view retirement as a chance to improve their skills and find another career opportunities for their age.
  


• Baby boomers quest for both personal and career fulfillment has becomes a driving force for them when preparing and planning for retirement. They secure social security by accessing health and life plans.
  


• Baby boomers are an optimistic generation with conservative financial hopefulness.
  


• So compared with their parents, baby boomers are far more likely to be continuously working while enjoying their leisure and comparatively the boomers made more money than their parents.
  

Tracing back to the annals of American history, the US economy has predominantly prospered since the baby boomers matured to enter the labor force. Historically, they are considered to be the prime source of the work force. But now that there is the expected demographic decline of baby boomers, the Unites States Bureau of Labor Statistics expect labor shortages that must be resolved quickly. Otherwise, it will inflict dire consequences to the economy.

However, there are some solutions to address the foreseen labor shortage by targeting the other variables that affect the demographic landscape. Organizations and firms can consider retaining the older workers, correcting the gender imbalance in work designations, outsourcing and hiring immigrants.

Since the baby boomers entered the labor force, the US economy has grown faster than its overall population. And the impending decline in the participation of baby boomers to service, will mean a slower rate of labor force growth as well as impact the economy.

(with edits) from helloboomers.com March 6th, 2009