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Tags: baby | boom | retirement | US

Protect Your Portfolio From a Baby Boom Bust

Wednesday, 14 September 2011 10:44 AM EDT

Are Generation X and Generation Y investors ready for a baby boom beating?

As the first wave of that pig-in-a-python generation — the 79 million Americans born between 1946 and 1964 — move into retirement, experts warn a boomer stock sell-off could cause equity valuations to plummet, likely sending the portfolios of young investors into a tailspin.

"The peak of the valuation in U.S. equities was 10 years ago," says T. Doug Dale Jr., an adviser with Security Ballew Wealth Management in Jackson, Mississippi. "Valuation levels are coming down. You have a lot of baby boomers selling off assets as they need to liquidate for retirement and that will further exacerbate the decline in valuations."

Researchers from the San Francisco Federal Reserve recently said that demographics actually point to a bearish trend in stocks. Aging populations create headwinds in the market, they said after studying the link between demographics and asset prices.

The Fed researchers looked at the ratio of investors aged 40 to 49 (those likely trying to build equity) to those aged 60 to 69 (those likely to be shifting allocation toward safer investment vehicles such as bonds).

They then compared this ratio to the year-end price/earnings ratio from 1954 to 2010 and found a strong correlation between shifting demographics and stock prices. Their results spell bad news for a full market recovery:

The model-generated path for real stock prices implied by demographic trends is quite bearish. Real stock prices follow a downward trend until 2021, cumulatively declining about 13 percent relative to 2010. The subsequent recovery is quite slow. Indeed, real stock prices are not expected to return to their 2010 level until 2027.


Not all younger investors are fleeing in panic.

"I'll probably just ride it out — if it's not great at first, we probably won't be pulling much out anyway," says 30-year-old Ruth Recktenwald, a Silicon Valley semiconductor technician. "If we take a loss, then we take a loss." Recktenwald and her husband annually invest in their 401(k)s, IRAs and Roth IRA accounts, and allocate their money to nothing riskier than broad-based index funds. They're following the traditional advice that young investors should aggressively seek returns, allocating most of their portfolios in equities.

But some people, like David Hefty, CEO and co-founder of Hefty Wealth Partners in Auburn, Indiana, say that traditional buy-and-hold strategy is out of whack with changing demographics. As a Gen X investor himself, Hefty, 34, says what worked for the baby boomers won't work for the generations of investors to come. He tells his clients to move their money around more aggressively.

"When you look at what happened with the boomers, you see that when we came out of a recession in 1982 there was an unprecedented bull market," Hefty says, adding the parents of Gen Y investors are stuck in the 1990's with a buy-and-hold mentality they're likely passing on to the next generation.

But research suggests Generation Y investors may already be shying away from equities, adopting a conservative approach thanks to the psychological baggage of the Great Recession. A recent survey by MFS Investment Management shows 40 percent of Gen Y investors said they agreed with the statement: "I will never feel comfortable investing in the stock market," while another 30 percent said protecting principle was their primary investment objective.

"Will that generation wind up being more conservative than the generations ahead of it? I would say yes," says Dale. "The generation that went through the Great Depression is what they're going to wind up looking like."

Advisers tell younger investors to steer a path between abject fear of stocks and blind allegiance. Here are some of the ways they say Gen X and Gen Y can build their own fortunes without getting slammed when the older folk sell.


Tactical asset allocation (TAA) is an active-management portfolio strategy that involves shifting your money among various asset classes in response to market conditions. It flies in the face of the traditional buy-and-hold strategy that boomers know and love.

"In your 401(k), do your homework and find a tactical management solution," says Hefty. "Push your HR department to make sure you get what you need to be successful."

Hefty believes his firm's tactical strategy will allow his clients to not only protect assets, but also to make money in a secular bear market as they did in the 2008-2009 financial crisis. "We're 100 percent in cash right now and this is fantastic for us," he says. "When things really start breaking down in the next few months, we'll probably start shorting the market to make money on the way down. Once it starts to bottom out and everyone in the country pulls out, we'll start buying stocks and ride it back up."

A word of caution for investors: Not all tactical managers are alike, and over the years there has been a lot of academic research pointing to the difficulty, if not impossibility, of profitably timing the market. Timing is everything in a tactical strategy, so it amplifies the risks of active management. In other words, the more flexibility your manager has, the more room for error. Also, active trading could increase fees and taxes.


The most famous and wealthy investor in the world — Warren Buffett — may have been on to something when he said, "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

When other investors are panicking, don't fall prey to a herd mentality, says Frank Fantozzi, president and CEO of Planned Financial Services in Cleveland, Ohio. "Whenever there is chaos, there is opportunity," he says.

When you look at the psychology of investing, people are often their own worst enemy — buying when the market is rising and selling off when they think it's tanking. "It's been proven time and time again that when you look at the average rate of return for a mutual fund and compare it to the average individual investor return, the average investor return is usually less than 50 percent" of the funds' return, says Fantozzi. So, don't trust your gut. Do the opposite.

Depending on your investment time horizon, a plummet in stock prices may be an ample opportunity to get greedy and load up on cheap equities, says Dale. "You have to be willing to buy more when stocks are down," he says. Even if your own holdings take a hit, if your timeline is long enough you should bounce back, cashing into the time-value of your investment.


The U.S. is not the economic powerhouse it used to be. In the 70's, the U.S. made up two-thirds of global GDP. Now, it sits around one-third, says Dale. "What that means is today, if you limit yourself to just investing domestically, you're limiting yourself to a third of the world's investing opportunities," he says.

Developing countries in the emerging world are growing at higher growth rates. As the global economy rebounded in 2010, lower-income countries (per capita incomes with less than $30,000 per year) averaged 6.6 percent growth compared to high-income countries (more than $30,000) that averaged 2.9 percent growth. Asian countries currently account for one-quarter of the world's middle class, but by 2020 that portion will likely double, accounting for more than 40 percent of global middle class consumption, according to the Organization for Economic Co-operation and Development (OECD). That's another reason, Dale says, to hold assets outside the U.S., particularly in emerging markets.

The demand from the new middle class will not only bolster global equities, but will likely help domestic valuations as well. "The people on a global level who are starting to invest, the people in Asia and South America, are developing a sense of middle class. Where are they going to put their money? There is going to be some level of demand from that group, even if it's 10 to 15 percent of what the U.S. is," says Fantozzi.

Bottom line? Be an active and engaged investor. If you sit on the sidelines, you'll likely miss an opportunity to either save your bacon or make some. "Any time you go through economic hardship, money is in motion. Those who are standing on the tracks lose all their money and those who are standing off to the side, collect all the money. During these types of times, think of who you know — your family, friends, colleagues — more of them will stand on the tracks than will step to the side," Hefty says.

© 2024 Thomson/Reuters. All rights reserved.

Are Generation X and Generation Y investors ready for a baby boom beating? As the first wave of that pig-in-a-python generation the 79 million Americans born between 1946 and 1964 move into retirement, experts warn a boomer stock sell-off could cause equity valuations...
Wednesday, 14 September 2011 10:44 AM
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