Tuesday, October 03, 2006

Will stocks go Boom?

Canada's National Post gives us all something to worry about it its series on the impact of an aging labor force. In the second part of the series, the paper examines whether as baby boomers retire if they will drive down stock prices.

Will stocks go Boom?:
"In the United States, for example, the ratio of workers to retirees is expected to fall to just 2.6 in 30 years, from 4.9 today. In Japan, the ratio of retirees to active workers is expected to fall even further, to one to one by about 2050.

In other words, the number of potential stock buyers will soon begin a steep decline....No less an authority than Jeremy Siegel, the famous Wharton finance professor and author of Stocks For The Long Run, has sounded the alarm, calling the ageing population the most critical issue facing the developed world."
What about the impact on finance? Not only will the changing workforce impact pension funds, social security, and health care costs, but it will likely drive down the stock market as the boomers end saving and begin to draw down their portfolios.

Now before you panic, the coming tidal wave of retirees in the developed world may be offset by other factors (notably foreign investment as more lesser developed countries develop and formerly impoverished people become investors) but it is something to consider and "gameplan".

Most likely outcome? As baby boomers age they will shift money out of stocks and this will be a factor that keeps returns lower than their historical averages. Which means we should all lower our projected returns. This unfortunately means we will have to save more for a comfortable retirement be it personally, in corporate pension funds, or in government sponsored "social security" accounts.

And if this analysis is wrong and the market continues to earn higher than historical norms? We will have set aside more than needed and you will have more money in your portfolio than expected, which is not the worst thing in the world!

Some past articles on this topic:
Will bomers drive down markets? (October 2004)

Porterba on impact of Boomers (November 2004)


Anonymous said...

With lower stock prices people like me will be able to buy stocks at a lower price. And since I will be holding then for the long haul its all teh better for us young adult. Buy low, Sell high. Bring the lower prices I'm ready to buy.

Lord said...

Returns must equalize across markets or money will move from those with smaller returns to those with higher. It is not so much the aging of the country that is the problem, but the aging of the world as population stablises. Growth may diminish with declining population growth, but it could just as well maintain itself as greater investments are made in the existing population. If it does diminish, then even the long haul will prove difficult although change will still admit some growth.

Freudian Slip said...

I agree that lower stock prices will be good for the younger generation. With real estate and everything else being so ridiculously high, it sure makes it hard for a young person to make there start. Something has gotta give.

Share Trading said...

In Australia it's becoming clear that everyone needs to save for their own retirement to feel really secure.