As retiring Baby Boomers flee to safer investments, some analysts fear there will be too many stocks and too few investors. But, a lot depends on how many of the more than 70 million Boomers can really afford a more conservative investing style, as they try to recover from a lost decade for the stock market.
For both a generation of Americans and our economy in general, it’s hardly a chump change question.
According to the Investment Company Institute, in June 2009, total U.S. retirement assets were $14.4 trillion, and in 2008, and the bulk of 401k assets remained invested in stocks.
Managing Director and head of BlackRock’s U.S. Retail Business, Frank Porcelli, says “the Boomers' appetite for risk is a facts and circumstances issue. What we see happening is that clients are bifurcating their money. They are distinguishing between essential and non-essential expenses.”
Conservative or Aggressive?
The essential part of the Boomers’ portfolios—money for mortgages, food, or healthcare—is being placed with more conservative applications. However, the non-essentials, such as money allocated for vacations, is being invested somewhat differently. There’s more risk and Boomers want to participate more on the upside.
Then, there is the last bucket of assets, the ones Boomers are hoping to pass on to their children. They are willing to invest those things more aggressively in private equity, hedge funds, and other more risky alternatives.
On the whole, however, the Boomers’ need for more return is quite a bit higher than would typically be the case and will continue to be so, says Consumer Strategist Richard Hastings at Global Hunter Securities. The two main reasons for this, he says, are the wealth destruction across most investment portfolios due to the concurrent stock and real estate market crashes, and Boomers’ improved health and longer life span.
According to the Federal Reserve Flow of Funds, the household balance sheet, after bottoming at $48.5 trillion in the first quarter of 2009, subsequently recovered to $53.4 trillion in the third quarter. However, household-sector net worth (or wealth) still trailed the second quarter 2007 record of $66.0 trillion by 19.17 percent.
Loss of Wealth, Loss of Confidence
Nearly half of the drop in household wealth since 2007 can be ascribed to a 48 percent plunge in homeowners' equity. And, though home equity has edged higher since the first quarter of 2009, it still remains in a range last seen in the second half of 1999. As recently as 2008, few expected homeowners’ equity to sink to levels last seen 10 years ago. The $6.2 trillion of homeowners’ equity in the third quarter of 2009 had sunk by $7.25 trillion from its $13.5 trillion zenith in the first quarter of 2006.
About 27 percent of the household sector’s loss of wealth since 2007 stemmed from a $3.4 trillion, or 22.7 percent dive in the market value of stocks and mutual funds directly held by households. Boomers have fresh memories of how the market value of equities and mutual funds was down by an even deeper 44% from its 2007 level as recently as the first quarter of 2009. A 38 percent run-up by the market value of equities and mutual funds between the first and third quarters of 2009 quickly restored $3.2 trillion of household wealth.
Boomers are willing to take risk because they want to make back some of the money that they’ve recently lost. George Walper, President of Spectrem Group, a firm specializing in the retirement market, points to a study his firm conducted in fall of 2008, when Boomers said that they had lost 40–50 percent of their net worth. “In the last twenty-four months, they have become more conservative and cautious, says Walper. “I now call them panic Boomers.”
But Boomers need to have hedges for inflation and need their assets to outpace inflation, Porcelli points out. “I think that people are nervous, but once we get on the back end of this crisis, earnings return and markets begin to act more normally and run. People need to be invested. They cannot afford to have their money in sub-one percent money market kind of products long term.”
Balancing Risks and Returns
Long term, they have to have a higher return on invested capital, agrees Hastings. Longevity makes people want to take more risk. Then, because they take on more risk, they have to be healthier and they have to live longer. “It is a really interesting behavioral scenario that takes the traditional World War II Baby Boomer retirement model that we got used to and throws it completely off the side of the cliff,” says Hastings. “It is feeding on itself. This is a big deal.”
Though Walper sees aging Boomers as concerned about the ability in their working lifetime to recover assets and becoming more conservative from an investment standpoint, he agrees that many in a wealth segment he refers to as “Mass Affluent”, which is $100,000 to 1 million of total assets not including their primary house, may never retire and may work part-time because they have no other choice.
Many, like Walper, feel Boomers will not be willing to take risk for a long time because, in their minds, the financial crisis created investment products that had an inordinate amount of risk.
Porcelli says this is not accurate. “I think we go through cycles in the U.S., some are more dramatic than others. I think the cure for this aversion to the market will be a rally and a meaningful rally. People will sense that they have missed things and you’ll see a lot of money which is currently on the sidelines in conservative bond portfolios, money funds and other things move back into the equity marketplace.”
However, the performance of the stock market is key to investing and savings scenarios. Let’s face it, in the last decade, Boomers have gone through two bear markets and the Dow has remained flat at about 11,000 in 2000 to 10,000 in 2010.
The Decade Ahead: Rebuilding Nest Eggs
Jeff Hirsh, Editor-in-Chief of the Stock Trader's Almanac, predicts in the next ten years it will swing the other way. He points to the fact that there have not been two back-to-back negative ten-year periods.
“I think we are coming to the end of this sideways period in the next year or two. Arguably, March 2009 could be the low for the 21st century. A general upward trajectory is in the process of resuming and my expectation is that 3, 5, 10 years down the line, the market will be substantially higher, at new all time highs.”
If retirement funding is heavily dependent on the essential bucket, boomers will probably proceed much more conservatively. If not, their excess funds are likely to be invested much more aggressively. But, either way, they need to know how to draw from their accumulated assets and financial planning needs have never been stronger than it is today.
Porcelli notes that the importance of professional advice and guidance has never been more needed in the U.S. market than it is today. “With what we have just come through, and people moving into retirement age, these are lifestyle decisions that if you get them wrong, you can change the trajectory of your life. You might need to go back to work when you are 75.”
Watch "Tom Brokaw Reports: Boomer$!", Thursday, March 4 at 9pm ET on CNBC. The program will also air Saturday, March 6 at 7pm ET; Sunday, March 7th at 9pm ET; and Monday, March 8th at 8pm ET.