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I just read an interesting article by Christine Benz of Morningstar. Each year at this time she takes a look at major financial firms projections for future market returns.
Although I don’t pay any attention to year end individuals’ market prognostications this article did catch my eye. She found that these financial firms have reduced their return expectations for US stocks. Every firm in her survey is expecting higher returns from non-US stocks than domestic over the next 10 years, and some firms’ 10-year bond market forecasts are higher than their return expectations for US stocks.
I’ve read articles about the value of boomer retirement accounts passed on to younger via estates. The “Great Wealth Transfer”. For example, “Baby boomers and the silent generation are expected to pass on $84.4 Trillion between now and 2045”. It is reasonable to assume that some of that won’t evaporate and will remain invested.
I’ve read often about the hazards of large and/or frequent portfolio changes. In a nutshell there is significant data that indicates that market timing doesn’t work. My last large portfolio overhaul was 2006. I rebalance annually and review occasionally. If my original thesis for purchasing a stock or ETF no longer holds, I’ll trim or sell. I have a portfolio of small, medium and large companies, 12% is foreign. Cash or equivalent to avoid selling in a down market. Morningstar X-ray tool states it is a core portfolio. A downturn might provide some buy opportunities.
I think one issue that gets over looked is demography. The boomers are a big population bubble and we tend to “break” things in every stage of life we move though due to no fault of our own, often coupled with the baby bust generation after us, etc.
Over half of the stock market is “owned” by funds in retirement accounts. The required minimum distributions will force withdrawals. There are not enough younger people, accounting for their stage in life and how much people contribute to retirement accounts in each stage to make up for the required withdrawals. This is going to mean that eventually the stock market will drop (supply and demand), followed in threeish years by the bond market. While some folks say 3rd world investors will make up the difference, so far, last I saw not one third world country on the list of the top 20 countries with investors in our stock market.
A related issue, that is going to increase, for some, spending retirement money rather than reinvest is is that when people sell their McMansions they are not going to get what they expect (except in a few housing areas). That is due to fewer people in the demographic groups who buy big houses (again supply and demand – the price of ranch and master on the first floor prices have been driven up faster than than any other “kind” of house – as both retirees and new home buyers are competing for the same homes). Not only that but the life span of many of the materials used to build those houses is about 50 years and so their repair needs will be higher. As a result those retirees will not get what they expected and will be more dependent upon what they take out of the market or their retirement accounts. That will also help drive the stock market down.
I rarely see discussions about the future include those variables/issues.
Well now I’m depressed!