With the Baby Boomer generation getting older and the market increasingly volatile, there has been a lot of debate about how the aging population can find an investment that will help pay for their retirement.
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Cash and gold
The San Francisco Fed released a study earlier this year that looks at the life stages of Americans born between 1946 and 1964. Its findings do not bode well for the stock markets, according to Nicholas Colas, the chief market strategist at ConvergEx.
In order to make the case for how preferences change over the course of a lifetime, Colas refers to what he describes as an "old wisdom" that you should marry three times across the course of your life. The first marriage, according to Colas, is for "physical companionship," the second spouse should be family-focused, and the third should provide excellent emotional and intellectual companionship to help you enjoy your old age.
“The aphorism seems to dismiss that romantic ideal in favor of hard-nosed pragmatics, notwithstanding divorce lawyers and associated transaction costs,” said Colas in a research note.
The marriages example shows how preferences can change over the course of one’s life, and this same phenomenon in preferences can effect the way you invest, according to Colas.
We tend to be less risk averse when young and willing to take bigger risks in order to make bigger returns, but when then as we grow older, we seek safety at the expense of profit.
In an attempt to follow this theory to its endpoint—while admitting the whole concept of demographics-based valuation needs more scrutiny—Colas applies the marriage theory to the market since the early 80’s.
“The first Boomers were born in 1946, making them 36 when the stock market started its 1,100 percent move from 1982-2000,” Colas said.
“The relationship was exciting at first, with a seemingly endless new array of investment opportunities. But after a while things just got too crazy,” said Colas, referring to the tech bubble of the late 90’s.
The second phase, when you want a marriage based on family values, saw the Baby Boomers snap up lots of property: bricks and mortar they could rely. That went well until the housing market blew up. It was time for another divorce.
Which means the Baby Boomers are now looking for some emotional and intellectual companionship to help them enjoy their later years. But what does that mean for the market?
“The Baby Boomer Investment Cycle doesn’t just explain dreadful equity valuations; it also neatly outlines why interest rates are so low,” said Colas. “Who else would accept a 2.22 percent yield for ten years, as any buyer of U.S. Treasury notes currently does? Someone who just wants quiet companionship with no drama.”
“Keep in mind that Baby Boomers aren’t going to go back to spouse number 1 (stocks). They tried that game in the 1990s and got burned. But offer them a safe dividend yield, and that’s likely an asset class with which they would be happy to spend winters in Boca,” he said.
The asset which Colas believes the Baby Boomers are now feeling good about in their third marriage, then, is gold and other precious metals.
“If the demographic explanation for big moves in capital markets is to have any validity, it has to explain gold. The yellow metal is well into its 11th year in rally mode, which makes me think that perhaps Boomers were seeing gold 'on the side' when they were still married to their houses.”
“But gold as an investment seems to fit some of the requirements for a good third spouse. Consider Wendy Deng Murdoch, who happens to be media mogul Rupert’s third wife. Age appropriate? Whatever. She stepped in to protect her husband when a proletarian ruffian tried to throw a cream pie. Gold is that kind of third spouse, I think,” said Colas, who hopes the Baby Boomers find a good investment spouse in their old age after the rocky ride on their first two marriages.
