Asset AllocationNovember 5, 2013

Baby Boomers’ Retirement Won't Be Disastrous for US Equities

<i>Research has found the fear about baby boomers’ retirement causing depressed equity prices is largely unfounded.</i>

Reported by Featured Author

(November 5, 2013) — Despite widespread speculation, baby boomers’ retirements are unlikely to damage the US equity markets, according to research from Vanguard.

The report said the assumption that these demographic changes will decrease demand for US equities resulting in low returns is caused by an oversight of various other factors that affect the stock market.

The conjecture derives from beliefs that baby boomers will liquidate their equity assets en masse as they approach retirement—an idea that is “spurious,” according to Vanguard.

“A 2006 analysis by the US Government Accountability Office of S&P 500 Index’s stock market returns from 1948 through 2004 supports our stance, pointing out that demographic variables generally accounted for less than 6% of stock market return variability—far less than macroeconomic, financial, and other unexplained variables,” the report said.

One of these other factors ignored was that the baby boomer generation spans over almost 20 years, suggesting a gradual asset rotation from US equities. The first of the baby boomers retired in 2011 and the last are expected to retire around 2030.

Baby boomers’ current equities ownership is not unusual, the report said. Equity holdings of 46- to 64-year-olds remained at an average of 48% from 1992 to 2010—a figure very similar to baby boomers’ current holdings of 47% of the US stock market.

“We believe this lack of movement of pre-retiree ownership of US equities undermines the thesis that the current time is different for baby boomers in terms of their ability to influence US equity returns,” the report said.

Also, equity ownership was largely concentrated among baby boomers with higher net assets—96% of all equities were held by the top 20% of boomers. This characteristic implied that the majority of holdings would be kept for the foreseeable to allow for long-term portfolio returns, which will contribute towards estate planning and bequest goals.

The globalization of the US equity market will also provide a cushion to the impact of impending retirements, Vanguard said. Overseas ownership of US stocks has increased to 21% by year-end 2012 from just 7% in 1990. Net purchases continued to grow even during the financial crisis.

Positive growth in US labor force, compared to those of other countries, will help ensure minimal demographic changes’ influence, the report said, adding: “Even a casual glance at the US experience raises doubts about the claims made by some that an aging population is bearish for US stock returns”.