Market, Baby Boomers Have a Lot Riding on Each Other
The future of the U.S. stock market may well rest on the shoulders of people such as Ralph and Diane Turner.
The 50-year-olds from Laguna Niguel have about $650,000 invested in stocks. But with the market in turmoil and retirement only 10 years away, the Turners are wondering whether it’s time to be more conservative. Amid the Nasdaq market’s 58% plunge from its peak and the blue-chip S&P; 500’s slide close to bear-market territory, “balanced” mutual funds and fixed-income investments are suddenly looking good.
“My time horizon isn’t the same as a younger person’s. Instead of looking down the road 25 years, I’m looking at five or 10,” Ralph said. “I’m still going to invest in the market, but I am going to take less risk than I did . . .”
The Turners and their fellow baby boomers--the 77 million Americans born from 1946 to 1964--represent about $3 trillion in invested assets, enough to make or break the U.S. stock market in the years ahead. During the 1990s, retirement-conscious boomers pouring money into 401(k) plans and individual retirement accounts were a major driver behind the stock market’s spectacular gains.
“Very small percentage changes in the asset allocation of individual investor portfolios have a very large impact on the market,” said Mark Harbour, area director of personal financial counseling at Ernst & Young in Los Angeles.
“If the baby boomers say, ‘Now that I’m within striking distance of retirement, I want to squeeze back my allocation to stocks,’ that is going to result in a fairly substantial reduction of cash into the equity markets. That has enormous implications,” Harbour said.
There could be a negative effect on stock prices even if baby boomers merely buy stocks at a more subdued pace.
“If the rate at which boomers insist on putting their money in the stock market begins to slow, it will take some of the upward pressure off prices,” said Terrance Odean, professor of finance at UC Davis. “That can create a snowballing effect.”
After the market crashed in October 1987, individual investors continued to pull money out of stock mutual funds for a full year. Though stocks recovered in 1988, the gains were muted until 1989, when fund outflows turned to inflows again.
Recent evidence suggests that investors may be starting to waver. Although net money flows into stock mutual funds were positive as recently as January, investors are pouring cash into conservative money market accounts at a record clip. A particularly trying February in the market led some analysts to predict that stock fund flows could turn negative.
That said, many boomer-generation investors continue to show a dogged commitment to riding out the market’s slump.
“History bears witness to the fact that the stock market will eventually rise again,” said Gary Schoelen, a 44-year-old air traffic controller with a hefty nest egg. “With that central theme in mind, [all of the stocks] I want are on sale today.”
Schoelen, who said he recently invested an additional $500 in the volatile Janus Twenty fund, doesn’t plan to tap this particular account until he’s 70. That gives him a time horizon of almost 30 years, which makes him comfortable with volatility and even some sustained drops in prices.
Martha Lee Watson, a 47-year-old Los Angeles business owner, is also buying while the market is down. Other families may be thinking about asset preservation rather than growth when they hit their mid-to-late 40s, but not Watson and her husband.
“Preservation is a word that doesn’t fit in our vocabulary,” she said.
That could prove to be a mistake, some experts warn.
It’s a bit early in the current market malaise to start predicting a return to the 1970s, a decade that saw the S&P; 500 produce an average return of just 5.9% a year. But some pundits fear exactly that kind of scenario--and the effect it could have on today’s generation of buy-and-hold investors accustomed to returns of 18% a year over the last decade.
Yale economist Robert J. Shiller, a noted market skeptic and author of “Irrational Exuberance” (Princeton University Press, 2000), thinks the current decade probably will see no net growth in blue-chip stock prices. That would make buying them now, or sticking with them, appear foolish.
“If there is a drop in confidence as we are seeing, the . . . baby boom is not going to support this market,” he said.
Shiller doesn’t advise dumping stock holdings en masse. But given his market outlook, he thinks it might be wise for investors--particularly those close to retirement--to shift a large chunk of their assets into something less volatile than stocks and with guaranteed income, such as inflation-indexed bonds.
“Statistics show that a good fraction of people nearing retirement are 100% in the market in their 401(k) plans,” Shiller said. “If you don’t have a lot of savings, you can’t afford big risks like that when you are nearing retirement.”
Even some bullish analysts aren’t predicting an endless vista of ever-rising markets. Investment author Harry S. Dent Jr., who predicted the 1990s stock boom based on his analysis of demographic trends, believes this decade will see a huge new run-up in stock prices, mainly because boomers will continue to produce and spend at high levels, fueling the economy.
But after 2008, when the largest wave of boomers will settle into retirement--a point when consumers typically spend less--Dent expects a bleak period for both the economy and the market that could last 12 years or more. That’s how long it will take for Generation X to hit middle age and start spending and producing more, he said.
His reasoning: The baby boomers’ impact on the stock market is undisputed, but it’s not their investments that matter--it’s their consumption.
“[Company] earnings drive the market, and earnings come from rising spending and productivity,” Dent said. “As people hit their late 40s their productivity and spending rises. The economy keeps booming, earnings keep ticking, and people will be right back in there. The market will come back.”
Even so, experts say there’s no disputing Shiller’s point that people who are nearing retirement age are taking a huge gamble if they keep too much of their money invested in stocks. The stock market always comes back, but “always” can take 10 or 15 years--a disaster for someone whose money is invested in depressed technology stocks just when it’s needed to pay living expenses.
With that in mind, financial planner Peg Downey of Silver Spring, Md., has two words for baby boomers: asset allocation.
When portfolios of Internet stocks were rising 100% a year, it was tough to convince investors that some of their money should be tucked away in bonds or money market funds. But as boomers creep toward retirement and the ‘90s stock boom fades into memory, the boring concept of asset allocation is taking on increasing importance.
“What’s amazing, really, is that until this last six months or year, no one was thinking that far ahead,” Downey said. “But people got really hurt this year, so they’re finally starting to worry.”
Downey has a quick rule of thumb: Any money that may be needed in the next 10 years should not be in the stock market. Money that’s not likely to be tapped for 11 or more years should remain in equities.
“It always comes down to when people are going to spend their money,” she said.
A 50-year-old who plans to retire at 55, for example, already should be moving some money out of stocks and into less risky investments such as money market funds or certificates of deposit.
However, stocks should still be an important part of a retiree’s portfolio, especially during the early years of a retirement that can last two decades or more. Retirees who structure their portfolios only for safety and not for growth may outlive their money.
“If you put too much of your money on the [conservative] side, you are going to hurt yourself long-term,” said Edward O’Hara, a planner at Capital Asset Management Services in Silver Spring.
Ralph Turner, for one, is shaken by the market’s slump of the last year, but says he has learned something.
“This has opened my eyes a little more to the idea that there’s enough volatility in this market that you can’t keep all your eggs in one basket,” he said.
“The stock market is a long-term investment that requires patience and understanding that everything doesn’t just go up forever. But it doesn’t go down forever either.”
