It’s not hidden, it’s not a secret, and everyone is part of it. Hidden in plain view are the demographic trends that drive the long-term evolution of populations and by, extension, societies. Frequently, short-term market gyrations capture investor interest at the expense of inexorable trends and it is useful and instructive to pause and take note of how those trends impact long-term investing. Widely studied and intensely scrutinized, demographics make society what it is. In turn, the members of society are the investors who drive markets. What are some of the widely-debated issues regarding population shifts and how can we as investors take note and ensure we are positioned for the long term?
Headlines such as “The Baby Boomer Time Bomb” and taglines such as “Stockmageddon!” serve to attract attention and raise awareness of demographic trends. The “Time Bomb” issue points to statistics from the U.S. Centers for Disease Control and Prevention and the Administration on Aging showing that by 2040, the U.S. population over the age of 65 will be nearly 22%, up from almost 15% in 2015. The implication is that baby boomers will sell down their equity portfolios to fund their retirements, reducing demand for equities. This in itself would not be problematic, as the upcoming Millennial generation should replace demand for stocks. The fear factor comes in with market commentators looking to a reluctance on the part of Millennials to invest, as they have been overburdened by student loans and traumatized by the dot-com bubble and global financial crisis. This is the generation that grew up with those traumas and childhood memories last a lifetime.
But is the risk credible?
In short, no. A report by the U.S. Government Accountability Office found that demographic variables accounted for less than 6% of U.S. equity market return variability. This fact alone diminishes the demographic shift’s influence on the market. Additionally, any rotation out of equities would be gradual because the baby boom generation spans nearly 20 years: the impact would be spread out over many years, with no single year bearing a significantly greater or lesser impact. Further, the Federal Reserve Board’s Survey of Consumer Finances shows that while the 45-to-64-year old cohort has risen from 19% to 26% of the population, its market ownership has hardly budged, holding within one percentage point of its 27-year average of 51%. Finally, widespread adoption of employer-based automatic enrollment retirement plans and a higher allocation to equites go on to debunk the theory that Millennials are reluctant to invest. In short, the Baby Boomer Time Bomb will not blow up the market.
A much more important lesson rarely enters the “demographics and investing” dialogue. Changing tastes (see below) dramatically alter the demand side of the equation in an economy.
For example, as Gen Z (those born in the late 1990’s to 2010) moves through the population pyramid, demand for football and baseball fall off dramatically, while basketball and soccer grow in popularity. Changing tastes require a supply response from companies. Television viewership, sponsorships, marketing deals: a whole host of changes enter into market dynamics. Identifying companies adept at “moving with the times” becomes an investment theme; conversely, avoiding companies that refuse or are too slow to adapt becomes equally important.
This point can be made very clearly: if you trade $10,000 for a bucket of gold today, in ten years, you will have exactly that: a bucket of gold. Nobody knows how much it will be worth, but you can be assured you have a bucket-of-gold’s worth of money. Contrast that outcome with a $10,000 investment in equities. Here, you have invested in organic entities. Nothing is static: companies are constantly evolving, changing, developing, creating. These organic entities are intensely aware of their customers: they see demographic trends unfold on a daily basis and they adapt. Where would you rather place your nest egg? In a static bucket or a greenhouse?