Will Demographics Explain Financial Market Returns?

One of the arguments for modest equity returns in the coming decades is based on demographics.  This was recently discussed in an article by Karen Damato, WSJ:

If you’re a baby boomer, you’ve got a big problem when it comes to the investment returns you can expect in retirement: It’s the sheer number of other boomers who are also getting ready to leave the workplace and rely on their portfolios to help pay the bills.

This has always seemed like an oversimplified analysis to me, especially when you consider that the lion’s share of financial wealth in the United States is held by the very wealthy.  James Groth, Real Clear Markets, provides the data:

Eighty-three percent of all financial wealth in America is held by the top 10 percent, and nearly half is held by the top 1 percent according to NYU economist Edward Wolff’s analysis of the Fed survey cited by Governor Raskin.

To what degree are the wealthiest Americans going to be “relying on their portfolios to help pay the bills?”  I don’t know the answer to that question, but it’s quite possible that the wealthiest Americans will be able to pay their bills from the income provided by those investments and other sources rather than being forced to draw down their portfolios.  Furthermore, global investors may step up to bolster demand for U.S. financial assets.

As usual, there is no crystal ball.  I suspect that the global financial markets, and quite possibly our domestic markets, will provide plenty of opportunities for strong gains in the coming decades. However, investors will need to save diligently so that they have the capital to participate and then adopt flexible investment strategies that can adapt as needed.

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