Not So Fast, My Friend

The Wall Street Journal had an article on Monday that made the case for lower interest rates due to baby boomers transitioning their portfolios from stocks to bond as they get older.

The first time I ever heard about the boomer’s impact on capital markets was in 1989 when I was at Lehman Brother’s.

There are many reasons to be skeptical about the conclusion of lower rates despite the visibility for more demand. First is that many boomers will be influenced, one way or another, by the notion that bonds do not protect against inflation. Inflation has been trending lower for 20 years. It makes sense to think that inflation cold generally heat up some for some multi year period.

The average life expectancy in the US, I believe, is the mid to late 70’s. However the number goes up dramatically once you make it to 65 (anyone that has the actual data, please jump in). Then factor in medical breakthroughs that will prolong life, what if Michael Milken is correct and cancer ceases to be a cause of death by 2015? What would that do to the number?

Portfolios will need to create growth for 30 years. Bonds won’t do that job.

Perhaps most importantly is that, in my opinion, this effect is the type of thing that the market prices in ahead of time in such a way that the impact comes far short of what is expected.

3 Comments

  1. Roger, you and WSG trumped what was going to be an article in my blog. However, since you’ve brought it up – average age expectantcy at birth for males is 74 and females, 79. If you reach age 60, then the average life expectantcy for a male reaches just about 80, and just over 83 for a female. More stats are located here:
    http://www.ssa.gov/OACT/STATS/table4c6.html

    And I agree with your conclusions – the boomers aren’t going to pull all their money out of the market. There’ll be a higher demand for high dividend stocks and things like REITs I imagine – while some will drift over to bonds, it’s not going to be at the ratio it might have been 30 or 40 years ago, in my opinion.

    JW

    Reply
  2. IF
    The gov. has to raise fed funds to stem inflation, the boomers will be able to keep their assets in the money markets to compete with stocks.

    Or
    The Chinese sell US bonds to buy (gold!) so THEIR currency is backed while we print more and more.

    …you never know…

    Reply
  3. As a boomer and a recently retired fed employee, I’ll say bonds are not for widows and orpahns or baby boomers either. My protfolio is way over 50% international and has been for years.

    Reply

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