Some financial market forecasters believe that the upcoming retirement of baby boomers spells trouble for the stock market in coming decades.
« These observers suggest that as baby boomers retire they will sell their stock holdings to generate income needed for retirement, causing stock prices to decline or at least to have limited appreciation potential, » says Dan Goldie a financial advisor to wealthy individuals and families in Menlo Park, California.
; »These same folks generally attribute the excessive stock gains of the 1990s to baby boomer accumulation of stocks. They assume that demography is destiny, and that demographic changes determine stock market returns. »
To a casual observer this might sound plausible, but logical analysis exposes the shortcomings of this thinking. There are many factors other than demographics that influence stock returns. According to Mr. Goldie, « It is far too simplistic to assume that basic population changes, which are known by markets participants decades in advance, are a major determinant of future stock returns. »
Long-term market returns are determined by the cost of capital, not demographics. Certainly, demographics could cause a change in the cost of capital, but it would likely be a small change and would affect all asset classes, not just stocks. In addition, there are numerous other macro factors that could have a meaningful mitigating influence over demographic effects on our economy, such as:
– Future immigration inflows of younger workers
– International capital flows
– Changing birth and death rates
– Relative aging patterns of other countries
– Changing work habits and income needs of older workers
– Productivity changes coinciding with aging workers
The forward-looking behavior of markets suggests that prices are not likely to decline significantly due to demographic changes. Mr. Goldie continues, « The world’s capital markets are a highly efficient information processing mechanism — probably the greatest the world has ever known. It seems highly unlikely that this market system, which can instantaneously process enormous amounts of information every second of every trading day, would fail to account for basic knowledge of population trends that has been known for decades. »
A doom-and-gloom forecast implicitly assumes that markets are incorrectly pricing the risk of population changes. Even if one assumes that markets are inefficient and do not price risk correctly, they are as likely to be under priced as overpriced. In other words, if we accept that markets don’t work and prices are wrong, we must also accept that prices could be wrong in a “positive” direction — i.e., priced too low, leading to higher unexpected returns as events unfold.
It is impossible to predict big macroeconomic changes decades in advance because dynamics of the global economy are too complex. Mr. Goldie says, « Simply put, demographic trends are easily dwarfed by other factors. There is also no evidence that older Americans systematically sell stocks as they age. »
Mr. Goldie’s analysis of historical patterns of stock holdings by age confirms that investors tend to not sell stocks as they get older. Using data from the Federal Reserve Board, Mr. Goldie observes that Americans over 55 have higher equity ownership than their younger cohorts and maintain it throughout their lives. This suggests that investors accumulate stocks during their high-earning years and do not dramatically reduce them in retirement.
Dan Goldie is a financial advisor to wealthy indviduals and families. He is located in Menlo Park, California. Investment Advisory services provided through Partnervest Advisory Services LLC.
For further information contact:
Dan Goldie
750 Menlo Avenue, Suite 200
Menlo Park, CA 94025
650-566-1121
http://www.dangoldie.com
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