BABY BOOMERS ARE PLAYING WITH FIRE
Everyone is talking about millennials these days and their growing importance to both the economy and the equity market. On the surface this makes some sense as they have now surpassed baby boomers as the largest living generation according to the U.S. Census Bureau.
However, as exciting as the rise of this younger cohort may be, the baby boomers are still the backbone of the U.S. economy and will continue to be so in the foreseeable future. Nearly 70 per cent of U.S. growth is driven by consumer spending of which the baby boomers account for half, according to Visa and Moody’s Analytics.
Ideally, this generation would like to de-risk or downsize their lifestyle with fewer big ticket items such as housing and automobiles as they enter retirement while ramping up spending on travel, entertainment and health care.
The problem is that low interest rates have kept this group spending beyond its means with many either increasing their debt load or drawing down their savings. According to the PWC 2017 Employee Financial Wellness Survey, nearly half of baby boomers say they have $100,000 or less saved for retirement. Not surprisingly, the same report shows that 62 per cent are postponing retirement because they haven’t saved enough.
Instead of reducing spending and increasing savings it’s much easier to take on greater risk with one’s investment portfolio especially when enticed by the strong near-term returns in certain markets and sectors. Record low interest rates are also having a tremendous influence as low-yielding bonds will do little to achieve one’s retirement objectives.
Therefore, baby boomers are joining the generations below it by piling on investment risk like never before and investment industry is happy to oblige.
A plethora of low-cost ETFs now allow these investors to “keep up” with the market for “fear of missing out.” There are even levered, double levered and triple levered ETFs that can torque up one’s exposure in order to play catch-up. And why shouldn’t they given the U.S. equity market is setting new records for duration without a correction as every dip is almost instantaneously bought up.
Then there are the headline grabbing investments which include bitcoin, tech and cannabis stocks that despite their excessive risk are not only garnishing a lot of capital but doing so very quickly thanks to their astounding near-term returns.
Bitcoin’s market capitalization is now more than that of Coca-Cola, a company with over 123,000 employees and $42 billion in revenue that sells 1.9 billion drinks per day, according to Charlie Bilello, director of research at Pension Partners.
Many Canadian marijuana stocks are trading at over 50 times revenue, while there are now 28 stocks in the S&P 500 trading at more than 10 times revenue, which compares to the 29 stocks trading at similar levels at the peak of the dotcom bubble, according to Jesse Felder of the Felder Report.
While many are attributing this to the millennials, it is more likely the baby boomers who are the ones moving these markets given the size of their portfolios. Interestingly on this note, according to Baltimore-based Legg-Mason and as cited in Business Insider, 85 per cent of millennials describe their long-term risk tolerance as “very conservative” or “somewhat conservative,” compared to 74 per cent of baby boomers.
Perhaps there is a lesson in here for the boomers.
Instead of chasing the excitement, now is a better time to undertake a financial review. This may mean cutting back on spending levels but it’s better to do so now than having a portfolio loaded with risk experience a correction, which could have a much greater effect on one’s lifestyle down the road.
This is also a great time to stress test one’s portfolio to see what would happen in the event of a correction in order to determine what kinds of risk controls are in place. This could mean adding in some alternative types of investments into the portfolio in addition to tweaking equity and bond positions. Finally, for those who can’t resist the temptation of the high flyers, there is nothing wrong with having a smaller allocation but one that wouldn’t have a serious impact if there was a material sell off.
Baby boomers are joining the generations below it by piling on investment risk like never before.