Avoid the Iceberg That Could Sink Your Portfolio

"There's an iceberg dead ahead. It's called global aging, and it threatens to bankrupt the great powers."

-- Peter Peterson, Gray Dawn: How the Coming Age Wave Will Transform America--And the World

The devastating iceberg that Peterson describes so dramatically is not exactly dead ahead, but without a doubt, we draw nearer to it every year.

As we fret and we scamper to address the immediate concerns related to inflation and our badly damaged economy, the entire developed world grows older. Investors face the dawn of a new era, one that may bring with it heavy and unprecedented declines in consumer strength and labor power.

Fail to account for these concerns over the long term and you might just find yourself on the wrong side of Mother Nature -- a place few investors ever dare to be. But, adjust accordingly and you'll unleash the raw power of biological growth.

Apocalypse today
You've heard how the aging of the baby boomers is going to cripple the developed nations in a great vacuum of consumption and productivity. You've heard how the failure of Social Security is just a numeric inevitability. You might have even heard how negative pressure imposed on the markets by retirees dipping into savings and investments will make broad market returns very difficult over the next three decades.

As an investor, what exactly have you done about it?  

The iceberg unleashed
In case you're a bit rusty on your data, let me hit you with a few fun facts:

  • According to the Department of Health and Human Services' Administration on Aging, 605 million people across the world were 60 or older in the year 2000. By 2050, that number is expected to be close to 2 billion, a total increase of 231%.
  • In 1900, at the dawn of this nation's economic explosion, just 4.1% of the United States population was over the age of 65. Today, that number is more like 12.5%. In 20 years, that number is expected to be 20%.         
  • According to analysts in the field, the over-65 population will begin to "bulge" in 2010 and will crest somewhere around the year 2035.

If the data above isn't evidence enough, the table below should horrify you sufficiently:

Percentages of the U.S. Population

Census
Year

Age 60 and Older

Age 65 and Older

 Age 85 and Older

1900

6.4%

4.1%

0.2%

1910

6.8%

4.3%

0.2%

1920

7.5%

4.7%

0.2%

1930

8.5%

5.4%

0.2%

1940

10.4%

6.8%

0.3%

1950

12.2%

8.1%

0.4%

1960

13.2%

9.2%

0.5%

1970

14.1%

9.9%

0.7%

1980

15.7%

11.3%

1%

1990

16.8%

12.6%

1.2%

2000

16.3%

12.4%

1.5%

2010

18.4%

13%

1.9%

2020

22.2%

16.1%

1.9%

2030

24.7%

19.3%

2.3%

2040

25.1%

20%

3.5%

2050

25.5%

20.2%

4.3%

Source: Administration of Aging, Department of Health and Human Services.

The U.S. is not alone
Old Europe is in worse shape. Like us, it has serious demographic issues coming down the pike, but add to that a flat (often negative) birthrate, in addition to a not-so-impressive history of accepting immigrants in its societies. According to Jeremy Siegel's The Future for Investors, more than 50% of Germans will be older than 65 by 2030. Yowza.

In Japan, the situation is worse still. Not only did its population already peak for the foreseeable future, but its numbers will also rapidly dwindle over the next half-century, losing 25% of its current population by 2050 -- a completely unprecedented event in the modern world. Japan's markets have already begun to reveal hints of a negative demographic discount, and there's no telling when we'll begin to experience similar penalties at home.

It seems the developed world is on a path to slow destruction, but not because of wars, famine, or plague. On the contrary, we've gotten too old too fast, and we're not willing to have enough babies to make up for it.

21st century investing
How does this play out for American investors?

Well, for a country whose gross domestic product is a full two-thirds dependent on consumption, how can it possibly be good? How can you expect retail giants like Best Buy (NYSE: BBY  ) , youth-oriented businesses like Walt Disney (NYSE: DIS  ) , banks like Citigroup (NYSE: C  ) , pop consumer icons like Apple (Nasdaq: AAPL  ) , and homebuilders like Pulte (NYSE: PHM  ) to even have a fighting chance at growth (or sustainability, even) when they're dealing with a bulging population that is retired, living on a fixed income, and slowly dying off?

Let's not even mention the current economic situation, one that pushes double-digit unemployment on top of horrible underlying fundamentals. Instead, let me simply ask you this: How many retired people do you know who buy lots of stuff?

Of course, these are all rather bold assumptions. No one says that 65 will forever be the retirement age. And it's quite possible that we're all failing to capture future developments in innovation and productivity in this country. And hey, maybe 65 is just the new 25? Indeed, life spans are increasing and people are living longer.

Unfortunately, knowing only what we know today, the signs we are seeing are just not good. In fact, we get a sneak peak just by looking at Japan.

But, all is not forsaken. In fact, there's plenty to look forward to, just not in the good ol' U.S. of A.

The right mix
Open your eyes. There are many parts of this world that look much like the U.S. did at the turn of the 20th century.

In Brazil (the world's fifth-most populous nation), less than 7% of the population is over 65, with a total figure that is growing more than 1% per year. In Indonesia (the world's fourth-most populous nation), 5.8% of the population is over 65, and its population is growing by an impressive 1.2% every year. Add rising prosperity to each of these nation's bigger equations and you get something sexy: American-style economic growth.

More impressive is India, whose population is growing at a full 1.5% per year. Fewer than 5% of the nation's 1.2 billion people are older than 65. India has more than 360 million people under the age of 14 alone, which nicely sets the stage for an overwhelming productivity cycle in decades to come, assuming a few things hold true. Yes, overwhelming poverty and horrible education systems and welfare programs are holding the population back, but these bodies are changing for the better. Take note: A huge number of Indians (I'm half myself) are getting smarter and richer -- and fast.

The Foolish bottom line
The U.S. and its developed brethren are not doomed by any means, but the world is changing, and if you have any interest in taking advantage of it, I seriously suggest you latch onto some of these larger-than-life trends.

You can do this one of two ways. Either you can hook onto global names you're already familiar with, like Yum! Brands (NYSE: YUM  ) and PepsiCo (NYSE: PEP  ) -- two examples of companies that are making big inroads in developing nations. Or, you can attack the big-name brands of the next generation, names like Telkom Indonesia, and get in on the ground floor. The choice is yours, but the trend is unstoppable.

If you're looking for just a few, great international ideas to jump-start your research, click here for a free 30-day trial to the market-beating Motley Fool Global Gains service. This is a service hell-bent on capturing global growth for years to come.

Nick Kapur is getting older by the day. He owns shares of Pepsi and is heavily invested in the developing world. Apple and Best Buy are Stock Advisor recommendations. Pepsi is an Income Investor recommendation, Yum! Brands is an Inside Value recommendation, and Telkom Indonesia is a Global Gains recommendation. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2010, at 5:26 PM, a2zdrewster wrote:

    Yeh, all the old people from the rest of the world came here, they know the loopholes better than we do. Live a lot better than our citizens on our tax $$. And that's the reason there's no old population there to hamper their growth

  • Report this Comment On January 11, 2010, at 6:23 PM, bblover wrote:

    I think you underestimate how active current 60 and 70 somethings (and many 80 and 90 somethings) are and how much future seniors will look to technology to make their lives easier. My husband and I are in our mid 60's and just bought iphones because iphone software seems straightforward - not so many buried submenus we have to try to remember -plus they have a big screen and we can easily control the size of the print even with slightly arthritic hands. We depend on e-mail via cell phones since we travel so much here and abroad. We recently put GPS in all our cars so we don't have to squint at maps while we drive. We did all our holiday shopping on line so we don't have to put up with large crowds and we can't wait until Peapod figures out than many of us are moving to warmer climates.

  • Report this Comment On January 11, 2010, at 7:40 PM, Fool wrote:

    Your graph should show what the age expectancy was for those years to reflect the comparison of expectation.

  • Report this Comment On January 11, 2010, at 8:12 PM, Rolin4ward wrote:

    The earth's resources are not unlimited. Even a small % increase increases geometrically. We need to find a way to maintain our standard of living and not rely on growth to do it. A dichotomy of economics and common sense. Check this out:

    http://www.youtube.com/watch?v=F-QA2rkpBSY

    I read that 35% of the welfare dished out in California was to immigrants. Don't get me started on illegal people. Billions of dollars that could stimulate California's economy and it's broke and we're talking about old people demographics?! Maybe if the old people and everyone else weren't taxed to oblivion to support others that don't pitch in economically, they would have more to spend and invest to stimulate the economy.

    Over 10% of Mexico's economy is from illicit money from the U.S. UNTAXED and we're supposed to feel good that illegal people are generating more people? Growth in this case is a double edge sword Motley Fool.

  • Report this Comment On January 11, 2010, at 8:37 PM, gs8212 wrote:

    I agree with an earlier comment. In relative terms of longevity, 65 years old in about 1932 when Soc Sec was passed, equates to approx. 85 years old today. Similar to using constant dollars to account for inflation, your chart needs to reflect "constant longevity" if you will. Side note: can you imagine what SS would look like if you couldn't file for SS until you were 85? But it makes sense. In 1932-years, we are paying 45 year olds to retire.

  • Report this Comment On January 12, 2010, at 10:47 AM, Gorm wrote:

    Addressing reduced consumption by seniors is only one changing dynamic.

    Consider:

    * 78M boomers are starting to retire and tax already failing SS and Medicare institutions.

    * Unable to find a job a surprising number of 62 year olds are opting for SS as a source of income.

    *The percentage of working to retired is approaching a 2:1 ratio, far below the 32:1 that existed when SS was created and life expectancy was 2 years less than retirement age.

    * Americans are living longer. Today life expectancy is 78. 100 years ago it was 53.

    * Part D drug bill exacerbates our problems as people will live longer drawing on SS and generate more expense to Medicare.

    *As the percentage of seniors grow, it is akin to "burden" in a business. You can only support so much before it absolutely cripples you.

    *Given the surge in US debt, falling tax revenues, increased debt servicing costs and increased entitlement demands create far more concern for me that reduced consumption!! Without HUGE changes we are destined for a much lower standard of living!!

  • Report this Comment On January 12, 2010, at 12:18 PM, cocacolakidcp wrote:

    In the past 100 years, medical and dental care has inproved exponentially. We have more and safer food and water.

    Doom and gloom predictions have been around more than 100 years.

    Chicken Little, the sky is not falling.

  • Report this Comment On January 12, 2010, at 3:01 PM, grthinker wrote:

    This guy poses the real question. I substituted the following YouTube address for the one he supplied because I think it addresses the problem more 'head-on.

    I do not believe population growth is necessary for economic growth. Yes, that might be wishful thinking, because it appears that I have no numbers to back up that belief. However, as the following link will show dramatically, the alternative is not pleasant.

    http://www.youtube.com/watch?v=Pb3JI8F9LQQ&NR=1

    On January 11, 2010, at 8:12 PM, Rolin4ward wrote:

    The earth's resources are not unlimited. Even a small % increase increases geometrically. We need to find a way to maintain our standard of living and not rely on growth to do it. A dichotomy of economics and common sense. Check this out:

  • Report this Comment On January 15, 2010, at 4:26 PM, gazkaz wrote:

    With the greatest respect to any 65+ olds (my parents are mid 80's and active), there is a difference between being defined as defined as a 65 + active pensioner; and working 35/60 hours a week on,( to take it to extremes - to illustrate a point), a city dealing desk.

    There are always exceptions, but walking around my city, looking at the "average" 65+ year old - who have worked for example in, heavy industry, they have earned their keep, & it shows there is nothing more to give..

    Removing any fixed retirement is the thin end of a very thick wedge, which quickly becomes the norm.

    Beware politicians offering "the option to........."

  • Report this Comment On January 15, 2010, at 9:45 PM, Charlesgoulart wrote:

    Crazy logic. There are lots of young people in Haiti; however, due to overpopulation and scarcity of resources I don't see any future there...

  • Report this Comment On January 15, 2010, at 9:54 PM, Charlesgoulart wrote:

    And regarding Brazil, here is a blog explaining some of the huge economic costs they already have due to deforestation:

    http://matasnativas.wordpress.com/

    The situation in India and China os probably worse.

  • Report this Comment On January 17, 2010, at 9:54 AM, Beanfarmer wrote:

    You quote Peter Peterson who has come late to the party. I have been reading Harry S. Dent, Jr. for more than 20 years. He paints a similar picture.

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