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By Dale Roberts
Special to the Financial Independence Hub
It’s a fear or suggestion that we hear repeated quite often. The massive cohort of retiring baby boomers will need to sell their stocks to create income and that will crash the stock markets.
Or let’s just say it could cause a slow bleed, taking down or suppressing the stock markets over the coming decades. As you may know the the stock market is, well, a market: it simply lines up the buyers and sellers and when there are more sellers than buyers the price of the stocks will decline.
When we hear the numbers on the baby boomers and more specifically how many boomers will retire each day, it’s often the US numbers that are repeated. When it comes to financial markets it is often very US-centric.
From this from Forbes.com article …
There were 77 million Baby Boomers born between 1947 and 1964, roughly 4.5 million per year. Some doomsayers are predicting the Boomers will drain the equity markets of their capital once they retire. Should you worry? Are your equity portfolios at risk?
It’s now predicted that there are 10,000 baby boomers retiring (in the US) each day. Now when the AARP releases figures such as that they simply use age 65 as a retirement date. Perhaps that’s not a bad benchmark but so many will retire well before age 65, and many more will not retire until well into their 70s and beyond. Many will not retire at all; they’ll continue with part time work. Baby boomers are known for being quite entrepreneurial.
And then, not all retiring baby boomers are going to go out and sell all of their stocks on their 65th birthdays. The public and private pension managers are not going to aggressively sell out of their US stock positions. Pensions hold well-diversified portfolios of US and International stocks and bonds and that also includes massive exposure to private equity: assets that are not ‘in’ the stock markets.
Why the boomers won’t crash the markets
The markets are mostly efficient and they factor in all available information with respect to individual stocks, economies and larger trends. It’s not news that North America is getting ‘older.’ That’s already priced in to the markets.
There is a heavy concentration of US stock ownership by more wealthy US citizens. The challenge for many may not be how fast can they sell their stocks but what to do with all of this wealth. Also, baby boomers are about to inherit over $15 trillion over the next 20 years. That will reduce or eliminate the need to sell those stock shares. You’ll find that, and some other interesting baby boomer stats in this Fool article.
I’ve been writing on Seeking Alpha for quite some time, and the readership is largely quite affluent. Many of these American boomer investors write more of accumulating more stocks in the retirement stage. In Retirees Don’t Say No When The Market Offers You A Nice Bonus I linked to a study that confirms that more affluent US retirees don’t spend down their retirement assets. They even become ‘savers.’
It’s a continual theme as well that many of these retirees ‘live off of the dividends.’ They’re not selling shares; they are simply collecting and spending the dividends. They will not put sell pressure on the markets.
New buyers
The millennial generation is even larger than the Baby Boomers and they will enter their accumulation stage and will be buyers of stock assets directly and by way of their pensions. There will be demand for stocks from younger generations. The Washington Post stated that the millennials will overtake the Boomers in 2019. We also have those echo-boomers and Gen-X’ers stepping in.
Bond yields are low; investors and pension managers know that they need those stocks for the longer term growth potential. Of course, we can often get greater income (and growing income) from stock dividends compared to bonds. The low yield environment also affects those newer and current accumulators as well as they may choose to shun low yielding bonds and embrace more stock exposure.
In Canada we see investors in that Balanced Growth Sweet Spot.
What history has to say
And if we look to the past and to studies, historically the correlation between age and asset prices is weak according to this white paper …
The correlation between asset returns on stocks, bonds, or bills, and the age structure of the U.S. population over the last seventy years, is weak. The results are more favorable to the demographic hypothesis when the level of asset prices, as measured by the price-dividend ratio for the S&P 500, is the dependent variable. None of the empirical findings provide a strong and convincing measure of the amount by which asset prices will change as the population of the United States and other developed nations ages.
The stock markets respond to the earnings (is a weighing machine over time) and the markets are now global and integrated …
With fully integrated global capital markets, asset prices and rates of return will depend only on global demographic forces to the extent that they affect the supply of saving.
Of course the world population is still exploding.
Once again, we might be back to that Benjamin Graham gem that the stock markets are a weighing machine over time. They will weigh the revenues and earnings of the companies and price accordingly. Capitalism is global in nature. Companies will continue to innovate and seek out new revenue streams at home and around the globe. S&P 500 companies generate nearly 50% of their revenues outside of US borders.
The success of the companies will likely determine future share prices, not the local demographic patterns. If there is continued global economic growth, the stock markets (even US) will likely go along for the ride.
We’re back to common sense diversification
It’s a common sense notion that we focus on what we can control. We can’t control boomers and how they spend their retirement assets. We don’t know with certainty how that may affect stock prices. Stock and bond markets go up and down for various reasons, all out of our control, all out of the ability to predict.
We look to that well diversified portfolio of local and International stocks and REITs in concert with some local and perhaps International bond exposure. I had suggested just that with this Seeking Alpha post: The More Complete US and International REIT Growth Portfolio.
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Dale Roberts is the Chief Disruptor at cutthecrapinvesting.com. A former ad guy and investment advisor, Dale now helps Canadians say goodbye to paying some of the highest investment fees in the world. This blog originally appeared on his site on July 9, 2019 and is republished on the Hub with permission.
