Baby boomers and stock prices
Miriam Hill: Hello, welcome to Vanguard’s Investment Commentary podcast series. I’m
Miriam Hill. In this month’s episode, we’re taking a look at the premise that baby boomers’
retirement will put downward pressure on stock prices. I’m here with Daniel Wallick , a
principal with Vanguard’s investment strategy group. Welcome Daniel, thanks for joining us.
Meet the speaker
Daniel Wallick: Miriam, it’s a pleasure to be here as an honorary boomer member.
Miriam Hill: Daniel, before we start talking about baby boomers and the stock market,
could we define our terms a little bit? Who are the baby boomers?
Daniel Wallick: Sure, I think it’s a great question to start with because there’s a lot of
discussion of that term and getting specific about it for our analysis was one of the starting
places that we needed to work on with the paper. And so for us the way we’re defining
it is the way that academicians often define it, which is anybody born between 1946 and
1964 and that cohort is considered the Baby Boom Generation.
Miriam Hill: Why is there speculation that baby boomers’ retirement could hurt stock
prices?
Daniel Wallick: I think there are a variety of reasons. There’s been some academic work
beginning in the mid-90s about the Baby Boom Generation and its impact on a variety
of prices based on two theories. There was the lifecycle investment hypothesis and the
lifecycle risk-aversion hypothesis, both of which speak to the fact that at different points in
your life, you’re interested in different things.
So from an investment standpoint that would mean in your 20s maybe you’re buying a
house but later on in life, you care more about retirement and coupled with that is this riskaversion hypothesis which would say as you get older, you have a less of an appetite for
risk. So, you’re more likely to pull back from your risky investments—the supposition is—
and the implication there is you might own less stocks.
That’s one reason. Another reason is, I don’t know if you remember it, I remember it.
There was an iconic picture on the cover of one of the investment magazines back in the
80s about Jerry Rubin working on a trading floor in Wall Street. He had been one of these
big time hippies and all of a sudden, he was working on Wall Street. So for a lot of people,
that meant the entire generation then subsequently fueled the growth of the stock market
through the 80s and the 90s. It was the ‘coming in’ of the baby boomers, the shift from
being hippies to being investors, and that really drove a lot of the UP in the market. And
so the expectation or speculation is that well now that they’re retiring and they’re going to
change their interest in what they care about, that may then draw-down the value of the
stock market.
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Daniel Wallick
Vanguard Investment
Strategy Group
Miriam Hill: You recently wrote a white paper taking a look at the question of whether those
draw-downs are likely to occur and affect the stock market. What did you find?
Daniel Wallick: Well contrary to that sort of intuition that there might be a negative
relationship, we found that we can’t find that negative relationship, and there are three
key reasons why that is. One is specific characteristics about the Baby Boom Generation.
The second is the increasing globalization that’s going on in the financial markets. And the
third is we also did some academic analysis that looked at sort of scientific or mathematical
relationships, and we just don’t find one between age and stock returns.
Miriam Hill: So when you talk about characteristics of the Baby Boom Generation that
mean they’re not likely to withdraw a lot of money from the stock market, what are those
characteristics?
Daniel Wallick: Well, there are really three key things that we found. One is if you think about
the baby boomers as we just talked about before—it’s almost a 20-year span. It’s 1946 to
1964 in terms of birth years. So that means that as baby boomers start to retire, they’re not
all going to retire on the same day. The impact of that generation’s going to be spread out
over two decades.
Number two is that the percentage of stock ownership by baby boomers as a cohort is very
similar to previous cohorts. So that age group, that 46 to 65 age group holds on a percentage
basis, the same amount that that age group has held over the last 20 years. So the fact that
it’s baby boomers as opposed to previous generations or subsequent generations really hasn’t
altered the amount of stock that that group owns.
Then the final and the third factor is the concentration of wealth. So, the top 10% of all equity
owners own 88% of all the stock and the reason that that’s significant is if you have that much
wealth concentrated, you’re not in a position where you need to sell. So, you have enough
disposable income or additional assets that you’re not required to spend that down to live on.
Miriam Hill: And what about globalization? How does that affect this equation?
Daniel Wallick: It was not long ago in 1990 that 7% of all the U.S. stocks were held by
foreign investors and as recently as 2012, that number had risen to 21%.
So, there’s an increasing amount of U.S. stocks that’s held by overseas owners. In fact, if you
look at the recent financial crisis between 2007 and 2009, there was no dip in stock ownership
among foreign investors of U.S. stocks and in fact, its net purchases over the last year was
$100 billion. So, there continues to be a very strong appetite worldwide for U.S. stocks.
Miriam Hill: Interesting, so far we’ve talked about the characteristics of the Baby Boom
Generation, the globalization of the U.S. equity market. You mentioned a third factor that you
think is relevant to whether baby boomers are likely to affect stock prices with some analysis
that you’ve done. Could you tell me a little bit about that?
Daniel Wallick: Sure, so we looked at the analysis in two different ways. One, we looked
at rolling correlation. So we took a 10-year average of stock prices and the percentage of
population over 65 in the U.S., and the correlation between those two numbers was very low.
It was around 5% or 6%. So there really wasn’t a strong relationship. And then the second thing we did was we expanded that analysis and we said, well let’s look
at 45 different countries all over the world and look at the same relationship. The relationship
of an aging population, and the stock market in those individual countries, and we found
that again, there was really, it was a regression analysis that we ran. There’s really no
strong relationship between those two factors—between the age of the population and
the stock market.
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And that seems counterintuitive to some people because what the implications are is that
well, aging population potentially means less people in the workforce, more people potentially
receiving a benefit. That might have a negative impact on the overall economy, and wouldn’t
that have a negative effect on the stock market?
But it gets back to sort of the fundamental core which is that we found that age had no
relationship to stock return. We also found that just economic growth in general didn’t have a
relationship with the stock market. And that’s true because there’s so many different factors
that go into play into what drives that stock value, that there is no one-to-one relationship
whether it be for economic relationship or even for the retiree age.
Miriam Hill: Given everything you looked at, what advice do you have for investors who might
be concerned about any boomer impact on the stocks?
Daniel Wallick: So again, what the analysis says in general is that there’s not a relationship
between the age of the baby boomers coming to retirement and a potential negative impact
on stocks. In the large part, that’s because if you think about stock returns as an equation,
just as a mathematical equation, there’s actually so many variables that would go into that, so
many components to that relationship, it would be a really long equation. And you can’t point
to any one of those with certainty that if this goes up then that goes down. So there is not
that sort of clarity of impact.
And so as a result of that, what we would suggest investors do is have a long-term strategic
asset allocation plan, and stick with that, that the noise you’re going to hear, you may hear
headlines or see the magazine covers or see on the internet the story about the baby boomer
retirement and the impact of that. That’s a lot of information to take in, but that’s not a reason
to change your long-term strategic plan unless your long-term objectives have changed.
Miriam Hill: Well thanks for sharing your research today, Daniel. We always appreciate your
insights.
Daniel Wallick: Miriam, thanks very much. It was a pleasure to be here.
Miriam Hill: And thank you for joining us for this Vanguard Investment Commentary podcast.
Be sure to check with us each month for more insights into the market and investing.
Thanks for listening.
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