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Get Four
|  | AUGUST 4, 2005
 FUND INVESTOR By Palash Ghosh A Word to the Wise Investor: DemographicsBoomers' sheer numbers and increasing longevity will impact investment trends, from school bonds to health care and the stocks of RV outfitsLike the rest of the developed world, the U.S. faces some dramatic demographic changes, which may drastically impact the government's budget, the fate of retirement assets, and the performance of financial markets, including the behavior of the investment community. These demographic shifts center on the aging and imminent retirement of the baby boomers -- the 80 million-or-so Americans born between 1946 and 1964. As boomers enter their twilight years, the next group coming up, Generation X -- about 75 million Americans born between 1961 and 1981 -- may be unwilling or unable to support the immense financial and health-care needs of their elders. A rapidly aging population, combined with a falling number of active workers, would represent an unprecedented tandem in U.S. history, and could significantly change the way we invest and what we invest in. Doomsayers have forecast that this confluence of events could bankrupt Social Security and exhaust Medicare and Medicaid long before the middle of the 21st century. WHAT RETIREMENT? Neil Howe, an economist who has written extensively about future demographics, says boomers are entering their peak earnings years, and that this is largely driving the economy. "After the oldest boomers become eligible to retire on Social Security in 2008, a steadily growing share of this large generation will be selling assets and consuming less," he predicts. "This could spell trouble for the stock market and the economy. A smaller and more income-strapped Generation X may not be able to pick up the slack." What does this mean for stock investors and mutual funds? It's very difficult to say, since mutual-fund managers and market participants don't invest with a multi-decade perspective. Most investors don't look beyond the next year or so for their portfolios. "The impact on mutual-fund investing will probably not be as severe as other prognosticators are warning," says Louis Harvey, president of Dalbar, a Boston-based mutual-fund consultant. The reason, Harvey says, is that retirees are beginning new careers instead of leaving the workforce altogether (See BW, 7/25/05, "When You Still Want to Work"). UNCHARTED COURSE. "I see a regeneration and a reentry into the workforce of these 'retired' folks, which gives them another 25 years in the labor force," Harvey predicts. "The impact on investing is that we won't see a sudden shift from accumulation to withdrawal. Rather, we'll likely see a gradual shift, a stabilization. Most retirees will keep their money in the market in one form or another." However, Harvey says that since mutual funds became an investment for ordinary people only in the 1980s, "We don't really have enough history to make any determinations on future fund-investor behavior." In many cases, retirement is being postponed, people are living and working longer, says Charlie Mayer, director of U.S. portfolio management at Pioneer Investment Management. "With tax laws changing and interest rates so low, many older investors could substitute equities for conservative bonds in their retirement portfolios," he says. "Baby boomers, in particular, have to not only take care of their children, but also their parents. But it's up to each individual's own risk profile to see how they can cope with retirement." GEN-X SKEPTICS. Howe strikes a more admonitory tone. "Baby boomers are worried that there will not be enough Social Security for them, and are worried about their overall financial security," he says. "They are uniquely lacking of confidence regarding their retirement. Boomers have trouble getting beyond their early expectations that 'the system' would somehow always take care of them. They had hoped they wouldn't really have to take personal responsibility." On the other hand, Howe points out, Generation X seems to have more confidence in their future retirements and financial health. "Gen-X never trusted the system, and they know it won't be there for them," he notes. "As such, they're making alternative arrangements for their futures." As far as the behavior of investors of different generations, Harvey notes that no generalizations can be easily made. "The theory of financial planning holds that the older one gets, the more conservatively one invests, but this is not true in practice," he says. Financial planners have a rule of thumb: your exposure to bonds should match your age, he says. If you're 40 years old, he explains, your portfolio should be 40% invested in bonds, and so on. PLAYING THE NUMBERS. "In practice, the younger investors -- Generation X -- tend to use fixed-income investments because they're not really paying attention to their assets," he says. "They stick their money in the bank or a CD, walk away, and don't manage their investments. Serious investors, regardless of age or generation, tend to be people who have accumulated, or inherited, some wealth." A handful of mutual funds, like the $396-million AIM Dent Demographic Trends Fund/A (ADDAX ), were devised specifically as a play on changing demographics. The portfolio was based on the ideas of economist Harry S. Dent, who has identified a number of generational trends, and the sectors expected to profit from them. In a nutshell, the fund focuses on the information-technology, financial-services, consumer-discretionary, and health-care industries. These are typically the businesses most widely regarded as benefiting from population trends, but the overall picture is extremely complex and subject to much conjecture. AIM Dent Demographics Trends Fund, which has performed poorly, is about to be folded into AIM Weingarten Fund/A (WEINX ). Some experts speculate that the graying of America will spell big profits for the health-care sector. However, Rodney Hathaway, co-manager of the Heartland Value Plus Fund (HRVIX ), doesn't necessarily agree. "A large pool of elderly retirees will require all kinds of medical care, and the product pipeline of the biotech and pharma companies may be there to meet this huge new demand -- but who will pay for it all?" he wonders.
BW MALL
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