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Demography is Destiny, How Demographic Trends will Depress Portfolio Returns
Old 03-05-2012, 01:11 PM   #1
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Demography is Destiny, How Demographic Trends will Depress Portfolio Returns

here's a little ray-of-sunshine to cheer you up !

Baby Boomers' Investment Returns Will Be Constrained, This Researcher Warns - WSJ.com

This phenomenon has been noted before by many other writers. All that is left is to what degree this effect will affect our livelihood.

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If you're a baby boomer, you've got a big problem when it comes to the investment returns you can expect in retirement: It's the sheer number of other boomers who are also getting ready to leave the workplace and rely on their portfolios to help pay the bills.
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Old 03-05-2012, 01:15 PM   #2
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The article seems a bit off base in its implication that only baby boomers returns will be constrained. Won't everybody's returns be constrained? Sure, the implications are different. Younger folks will have an issue growing their portfolios to FI status while we boomers might have trouble with portfolio survivability issues, but we'll ALL have issues, not just boomers.
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Old 03-05-2012, 02:02 PM   #3
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How big of an effect is this really going to have in a global market?

If equities offer attractive returns, I suspect that they will pull money from all over the world.

All those rising Chinese folks with the massive savings rates may end up pushing returns up. I think its time to start marketing mutual funds in China
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Old 03-05-2012, 02:08 PM   #4
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Originally Posted by Hamlet View Post
How big of an effect is this really going to have in a global market?

If equities offer attractive returns, I suspect that they will pull money from all over the world.

All those rising Chinese folks with the massive savings rates may end up pushing returns up. I think its time to start marketing mutual funds in China
They mention this in the article and then downplay it without giving a reason why. I think demographics are going to be more important for strictly national issues (like government revenues and spending) and less relevant to global capital markets, as you correctly point out.
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Old 03-05-2012, 02:41 PM   #5
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His numbers of 10 to 1 and 1 to 10 didn't sound right. What am I missing?

The Past
President Franklin D. Roosevelt signed the Social Security Act in 1935 as a direct result of the economic depression of the 1930s. Originally, only retirement benefits were paid to the primary worker. The law was amended in 1939 to add survivors’ benefits and benefits for the retiree’s spouse and children. Disability benefits were added in 1956.
Social Security is a “pay-as-you-go” program, which means that today’s workers are paying for the benefits to today’s beneficiaries through their payroll taxes. In 1940, there were 42 workers per retiree. In 1950, the ratio was 16-to-1. In 2010, there were 2.8 workers per retiree, and within 40 years, it’s projected that there will be just two workers per retiree¹. At the present rate, as the population ages and life expectancies continue to rise, the system will not be able to sustain itself into the future without major reform.
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Old 03-05-2012, 03:03 PM   #6
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US boomers present a challenge but one can make an argument that the "gray tsunami" in the US won't be nearly as onerous as most other leading economies today, and therefore we'll have a relative demographic advantage. Despite boomers, we've had (already in the pipeline so to speak) higher birth rates than many other developed countries, they will have an even tougher time on that front. And the US has always been more open to legal immigration than most if not all other countries, not much diversity in other countries. Stay tuned...
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Today, the U.S. fertility rate of over two children per woman remains as much as twice as high as many countries, including Russia, Germany, Japan, Italy, Singapore and Korea. As a result, according to U.S. census projections, the United States will continue to grow to upwards of 420 million by 2050.

In contrast, the populations of longterm competitors among advanced countries—including the European Union, Japan and Russia—are all expected to stagnate and then decline. Japan is a particularly hard case. Its fertility rate has dropped by a third since 1975. By 2015, a full quarter of the Japanese population will be over 65. Generally inhospitable to immigrants, Japan could see its population drop from a current 127 million to 95 million by 2050, with as much as 40 percent of the population over 65 years of age. By then, no matter how innovative the workforce, Dai Nippon will simply be too old to compete.

To a large extent, Europe shares this dilemma. By 2050, Europe’s population, now numbering 730 million people, will shrink by 75 to 100 million. Italy’s population alone is slated to drop by 22 percent, while Poland’s will be reduced to 15 percent.

Due to the one child policy and rapid urbanization, China’s population growth is also expected to slow significantly in coming years while the proportion of seniors soars. In the longer run, population growth will be stymied by a large surplus of boys over girls. As a result, notes demographer Nicholas Eberstadt, more than 25 percent of men in their late 30s by 2030 are likely never to marry.

Perhaps even more challenged will be Russia, whose low birth and high mortality rates suggest that its population will drop 30 percent by 2050 to less than one-third of that of the U.S. Even Prime Minister Vladimir Putin has spoken of "the serious threat of turning into a decaying nation."
America's Demographic Opportunity | Joel Kotkin
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Old 03-05-2012, 03:03 PM   #7
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Originally Posted by Hamlet View Post
How big of an effect is this really going to have in a global market?

If equities offer attractive returns, I suspect that they will pull money from all over the world.

All those rising Chinese folks with the massive savings rates may end up pushing returns up. I think its time to start marketing mutual funds in China
This effect is driven by the baby boom which was a nearly world-wide phenomenon. The chinese have their own boom that starts about 10 years later.

Fundamental valuations aside, in a nutshell boomers will aquire lots of capital investments to pre-fund their retirements while working pushing up prices. And then boomers in their retirement will sell lots of those aquired capital investments to realize their retirements pushing down prices.

That's the strong headwind the author refers to for the Boomers.
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Old 03-05-2012, 03:09 PM   #8
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It's a challenge but one can make an argument that the "gray tsunami" in the US won't be nearly as onerous as most other leading economies today, and therefore we'll have a relative demographic advantage. Despite boomers, we've had (already in the pipeline so to speak) higher birth rates than many other developed countries, they will have an even tougher time on that front. And the US has always been more open to legal immigration than most if not all other countries, not much diversity in other countries. One day we'll see who's right.America's Demographic Opportunity | Joel Kotkin
So we won't have as hard a landing as say Japan, but it will still impact hard nonetheless.

Per the imiigration thing, the type of immigrants is important. Highly skilled workers are much more important than the unskilled types. We. as a country, are doing our best to chase away the highly skilled and open up our borders to the unskilled. That makes the problems worse, not better.
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Old 03-05-2012, 03:25 PM   #9
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Despite boomers, we've had (already in the pipeline so to speak) higher birth rates than many other developed countries, they will have an even tougher time on that front. And the US has always been more open to legal immigration than most if not all other countries, not much diversity in other countries.
It's true. Liberal immigration policies are the ultimate in supply-side economics.
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Old 03-05-2012, 03:31 PM   #10
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Fundamental valuations aside, in a nutshell boomers will aquire lots of capital investments to pre-fund their retirements while working pushing up prices. And then boomers in their retirement will sell lots of those aquired capital investments to realize their retirements pushing down prices.
This may be true but isn't the only thing going on. The world is becoming considerably richer at a glorious rate. As a rule, subsistance farmers don't invest in stocks and bonds . . . but their far wealthier children probably will.
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Old 03-05-2012, 04:15 PM   #11
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This may be true but isn't the only thing going on. The world is becoming considerably richer at a glorious rate. As a rule, subsistance farmers don't invest in stocks and bonds . . . but their far wealthier children probably will.
Which is why he suggested we should have greater allocation to BRIC. No?
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Old 03-05-2012, 05:04 PM   #12
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Until we have the unemployment rate get back down under 5%, it's hard to sweat the demographics too much. And when we get down that low, we can be more liberal in our immigration policy .

I do think older boomers means less money in pure equities causing P/Es to remain lower, and more money chasing fixed income and dividends, putting pressure on yields. But I think generally, boomers will stay invested. They won't spend it all at once!

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Old 03-05-2012, 07:38 PM   #13
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The name escapes me right now, but there is some demographer that wrote a couple books on this several years back. There was an investment company formed that follows his research and invests per the results of his demographic predictions.

After reading his work, I thought it had some value, but my conclusion was that he was giving too much weight to only one series of variables. I suspect there are many other variables that affect market prices besides the number of heads of households of a certain age.

Maybe someone else on the board can come up with that authors name?

Did a search and found the guy. Look up Harry Dent if you're interested in the demographic view point on investing.
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Old 03-05-2012, 08:27 PM   #14
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Nothing new here. This baby boomer retirement effect has been discussed for years. I imagine the market has already discounted it.
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Old 03-05-2012, 08:40 PM   #15
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After reading his work, I thought it had some value, but my conclusion was that he was giving too much weight to only one series of variables. I suspect there are many other variables that affect market prices besides the number of heads of households of a certain age.
That is my thinking as well. It seems like a theory that holds in a closed system, where the U.S. is the only place on earth, but the U.S. isn't the only place on earth. And if you think of the mechanics of how this is supposed to work, it's hard not coming to the conclusion that it is self correcting in a world of global capital flows.

The theory is that as Baby Boomers transition from saving to dis-saving they will put downward pressure on asset values. Again, this works nicely in a closed system. But in an open system, lower U.S. asset values become bargains for global investors. The only way the Baby Boomers can depress asset prices is if other investors are either unable, or unwilling, to buy what the boomers are selling.

I guess Boomers may have a greater propensity to invest in U.S. assets than foreigners and that this difference may result in some downward pressure on domestic asset values. But are we really arguing that hedge funds won't step in to arbitrage whatever valuation discrepancies exist between U.S. asset values and their foreign rivals? That doesn't sound reasonable to me.

Another possible scenario is that U.S. Boomer investment dollars are so important that their absence will depress asset valuations throughout the entire world. That doesn't seem reasonable to me either.

I think in the end this is a case of American citizens in general, and Boomers in particular, overstating their importance in the world.
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Old 03-05-2012, 11:37 PM   #16
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At the risk of sounding self centered, I wonder how this will play out for people in my generation.

I can deal with 10-15 more years of poor returns, but if I can't FIRE due to market conditions, despite having saved so much over the years, I'll feel like a bit of a chump.
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Old 03-06-2012, 12:00 AM   #17
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Originally Posted by Masquernom View Post
The name escapes me right now, but there is some demographer that wrote a couple books on this several years back. There was an investment company formed that follows his research and invests per the results of his demographic predictions.

After reading his work, I thought it had some value, but my conclusion was that he was giving too much weight to only one series of variables. I suspect there are many other variables that affect market prices besides the number of heads of households of a certain age.

Maybe someone else on the board can come up with that authors name?

Did a search and found the guy. Look up Harry Dent if you're interested in the demographic view point on investing.
Harry Dent promised us an incredible 2000s for US equity markets based on demographics. Later to fall apart approaching 2010 when most of the high-earning boomers started to leave the workforce. Unfortunately for us, the party stopped 8-10 years earlier than he predicted.

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Old 03-06-2012, 01:04 AM   #18
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I think demographics are important but far more complex as others have pointed out. The globalization of the market (the world is flatter) the effect of echo boomers ( children of the Boomers are a big force too) and the possibility that Boomers may just help out their Echo Boomers in ways that the Greatest generation did not, could not, and did not need to help the Boomers ( buying homes for their kids to help them and to get them the heck,out of their own basements). Also I think Harry Dent's analyses of how people at certain ages tend to buy the same things every decade of their lives are probably mostly true.. . with the exception that longer life spans, better health in the affluent now tend tomake 60 the new 40 etc...which shifts the spending somewhat...I think a lot of Boomers are in denial of their own mortality and will spend more like they are 45 than 65. In fact they are probably as far from death at 65 as prior generations were at 45. or close enough to spend more like younger folk do, anyway...all of which I think will blunt the doomsday predicted and lead to a pretty good boomlet coming over the next 15-20 years.
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Old 03-06-2012, 08:38 AM   #19
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At the risk of sounding self centered, I wonder how this will play out for people in my generation.

I can deal with 10-15 more years of poor returns, but if I can't FIRE due to market conditions, despite having saved so much over the years, I'll feel like a bit of a chump.
Why would you feel like "a bit of a chump"? Would you do something different knowing for certain that you are facing 10 years of poor returns?

Just saying that events totally outside of your control shouldn't somehow make you a bad person.
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Old 03-06-2012, 09:06 AM   #20
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I am going to have to read this article sometime....

But, can someone square this theme with all the other articles we read where it says almost all Baby Boomers do not have enough to retire

IOW, if this article is saying most people will retire and returns are low, and the other article says most people will not retire because they just do not have the funds.... one has to be wrong... (also, if you do retire and do not have any funds it still is the same as not retiring in the context of this article.... you do not have a portfolio to support you so you are left out)....
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