BOOMERS BUSTING BONDS
Exit stocks in 401(k)s
Blame it on the boomers. That’s how some market analysts are categorizing the meager interest returns Americans are getting on their savings accounts.
Baby boomers have been moving their retirement funds into the bond market in droves, keeping yields at historic lows.
Over the past three years, for each dollar that went into a stock fund, almost $5 went into a bond fund, according to Lipper, a fund-rating service, in a recent report.
“Perhaps it is just a matter of demographics at work, but we have seen a strong trend in mutual fund flows that suggests investors have begun earnestly diversifying their portfolios toward fixed-income products, in many cases away from equity funds,” says Tom Roseen, a senior analyst with Lipper.
Roseen added that it’s “definitely a significant change in the investment trend from 10 years ago.” And “the trend of people buying more bonds has been going on this year.”
What does this mean for stocks? Well, unlike the Internet bubble, where investors chased the phantom profits of overnight sensations, today’s equity valuations come at the same time a new study warns that nations with older populations are likely to see lower stock returns over the next decade.
“Stocks perform best when the roster of people age 35-59 is particularly large, and when the roster of people age 45-64 is fast-growing,” wrote Robert Arnott and Denis Chaves, who run Research Affiliates, an investment bank in Newport Beach, Calif.
“Bonds follow a similar pattern, with an age shift: They’re best when the roster of people age 50-69 is growing quickly,” Arnott and Chaves wrote in the January/february issue of the Financial Analyst Journal, a publication of CFA Institute, an organization of investment professionals.
Why do the investing habits of those in or near retirement tend to drive down stock prices?
“As they slide into retirement,” Arnott and Chaves write, “they begin to sell assets in order to buy goods and services that they no longer produce — either directly, through their own investments, or indirectly, through their pension benefits. They tend to liquidate their riskiest assets (stocks) before their less-risky assets (bonds),” according to the study.
That seems to be happening in the US right now.
Still, advisers, who agree that the boomers are a part of the change, say the downward pressure on stock prices could be self-perpetuating. “Poor markets over the last decade, including the memory of the meltdown of 2008 or the flash crash, could hurt the stock market,” says Kevin Mcdevitt, an analyst with Morningstar. Indeed, the generation comprising the children of the boomers could perpetuate the trend.
“People are still skittish about 2008. And they also made very good money in bonds last year, while stocks didn’t return anything,” says Charles Hughes, an adviser in Bay Shore on Long Island. He notes that Barclays Bond Index returned some 7.8 percent last year while the stock market was unchanged. That, together with memories of 2008, are why stock funds aren’t popular, he says.
“Investors are worried about getting burned again as they did in 2008,” Lipper’s Roseen agrees. “And there are plenty of boomers who are worried about losing too much money just before they need it for retirement,” Roseen says.