For decades, the baby-boom generation has captured the attention of those looking for a demographic secret to successful investing. As the first of the boomers start to approach normal retirement age, the big question that many investors have is this: Are cash-seeking baby-boomers going to dump stocks, leading to the next downturn for the market?
Testing the theory
The idea behind the concern that many have over the boomer cohort's impending retirement is pretty simple. Boomers collectively have a lot of money, and in order to finance their living expenses in retirement, they'll need to cash in their investments. Because there are a lot of boomers and a relatively smaller group of young workers accumulating wealth and making new investments, the resulting imbalance in buying and selling will result in prices falling.
The Congressional Budget Office (CBO) recently took a closer look at this theory to see if a major disruption to the financial markets was likely. It concluded that retiring baby boomers were unlikely to cause a big drop in prices of stocks and other financial assets for a variety of reasons, including the following:
- Like most retirees, baby boomers will have an incentive to try to preserve their savings as long as possible, and so it's unlikely that they'll sell off their investments all at once. Markets should be able to absorb a more gradual pace of boomers' sales.
- In particular, concerns about rising health-care costs, the desire to leave money to future generations, and the fact that many boomers have enough wealth to make massive liquidations unnecessary should combine to drive boomers to keep their investments rather than selling them.
- Because the baby-boom generation is 18 years long, made up of people born from 1946 to 1964, boomers will obviously retire at different times in the future. It'll take decades for the full effects of retiring boomers to make itself known, and the extended duration of the transition should moderate its impact.
- Regardless of demographic trends in the U.S., economic development throughout the world will increase demand among foreign buyers to buy U.S. financial assets, lifting prices.
Of these reasons, the last seems the most compelling. Already, foreign companies have expressed interest in making major investments in U.S. companies, such as CNOOC's (NYSE: CEO ) unsuccessful bid for Unocal, which was later acquired by Chevron (NYSE: CVX ) . In addition, foreign businesses have provided infusions of capital to several struggling companies in past years, including Citigroup (NYSE: C ) and Morgan Stanley (NYSE: MS ) . More recently, the China Investment Corporation reportedly bought a stake in the electricity company AES (NYSE: AES ) , and further acquisitions seem likely for the foreseeable future.
Looking at asset mixes
That's good news for the financial markets generally. But a variant of the primary theory sounds potentially more plausible. It goes like this: Even if retiring boomers keep their stocks, one might think that they'd move their money from risky, highly volatile stocks to more conservative investments. That could help investors in blue-chips like IBM (NYSE: IBM ) and Procter & Gamble (NYSE: PG ) but hurt those who gravitated toward small-caps and other higher-risk assets.
The CBO report, however, debunks that theory as well. Despite financial advice to the contrary, the CBO found that in reality, most aging retirees don't reduce their general allocations to stocks or to particular types of stocks.
What to do
Skeptical investors will note that being a government agency, the CBO has at least some political incentive to downplay any threat to the financial markets, especially given the events of the past year. Yet the CBO has often taken controversial positions contrary to other government agencies, on issues ranging from the budget deficit to health-care costs. Most experts trust its impartiality.
The CBO report suggests that whether you're a baby-boomer or someone on either side of that group, you should be able to keep following your own investing strategy without fear of a large demographic effect on stocks. Given all the other challenges that investors face right now, taking even a single item off your worry list is a nice thing to be able to do.
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