Many investors are concerned that the aging baby boomers will adversely affect equity markets and home prices by dumping their stocks and selling their homes, leading to a sharp decline in prices for both.
Changing Demographics: Economic Implications
The aging population will definitely have economic and financial consequences. As older workers retire, the limited availability of a replacement workforce will likely result in slower economic growth. This, in turn, will reduce annual corporate earnings and profit growth.
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The implication for investors is that the average annual returns on stocks would probably go down by about a percentage point (according to TD analysts).
Changing Asset Allocation
Investors are advised to change their portfolio asset mix as they age, replacing their equities with fixed income products. This promotes the fear that equity markets will plummet.
However, the boomer generation spans 18 years (born between 1946 and 1964), so the impact of any asset sales should be spread out. This gradual selling will be indiscernible against normal year-to-year fluctuations.
It is probable that the main shift will be away from small-cap and growth stocks to large-cap and high yield dividend-paying stocks as older investors attempt to increase their income before depleting their assets.
Also, bond yields are so low that fixed income products will probably only provide capital preservation, especially after accounting for inflation and taxes.
The impact will also be limited by the fact that baby boomers are living longer, healthier lives.
As baby boomers start selling their homes, any increase in housing supply will be offset somewhat by a reduction in new home construction. Therefore, it’s unlikely that the real estate market will be depressed for this reason.
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Regional economic development and increased immigration will affect house prices in major urban centres more than the unlikely event that all the boomers sell their houses at the same time.
Changing Spending Patterns
Baby Boomers’ spending patterns and shifting needs will influence different industries and sectors. For example, longer lifespans and the focus on preventative care will encourage greater spending on health care, new drugs and managed care facilities.
Lifestyle communities are being created and the leisure and travel industries are gearing up for a huge increase in consumers looking for ways to spend their retirement time.
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Financial services and information technology are also sectors likely to profit.
It’s clear that changing demographics will affect the economy and financial markets in the years ahead, but worries about a dramatic negative effect are exaggerated.
As Canada’s population changes, spotting the opportunities is more important than worrying.