Sighting: Will Baby Boomers Cause
a Market Meltdown?
"With approximately 75 million baby boomers gearing up for retirement, it's not surprising that some investors are concerned that this huge wave of retirees will spell doom for the stock market. Some fear the possibility of a 'market meltdown'—a sharp decline in stock prices as aging boomers start selling off their stocks.
"Because this is the first outsized demographic group to make its way through the financial markets, the potential effect on stock returns is unknown. But certain factors suggest the market impact could be minimal—casting doubt on the dire predictions for equities. Here's why a sudden 'meltdown' is unlikely:
• "Withdrawals will happen gradually—over time. The meltdown hypothesis typically assumes a sudden liquidation of stocks over a short period. But the baby boom itself spans nearly two decades, and the retirements could span 20 to 30 years. As boomers spend their financial assets during retirement, we're more likely to see a gradual selling of holdings over a long period of time, rather than an abrupt, mass exodus from the stock market.
• "The wealthy aren't likely to sell much in retirement. Another factor to consider is that the richest 10% of U.S. households own 88% of the individual equities held by households. Wealthy boomers are more likely to live off of their dividend income, leaving their assets to future generations.
• "The market's participants go beyond baby boomers. Even if many baby boomers liquidate large portions of their stock positions, other buyers would likely emerge. Generation Y (those born in the 1980s and 1990s) is almost as large as the boomer population and is a natural purchaser of the boomers' assets. There are also endowments, foundations, and other stock market participants whose portfolios are less affected by aging. Furthermore, the market for U.S. equities is global, and investors will likely emerge from rapidly developing economies such as China and India.
"Risk will always be part of the stock market—whether it's in the shape of normal market fluctuations or caused by a demographic shift, technological innovation, or sociopolitical change. Savvy investors know that a sensible response is to hold a well-balanced and diversified portfolio, which may make it easier to weather the inevitable shocks."
— In the Vanguard, Summer 2005, Vanguard Group
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