Baby Boomers and Stock Valuations

Will the retirement of baby boomers impact the valuations of stocks? Research published by the Federal Reserve Bank of San Francisco argues it may.

The study’s authors, Fed researchers Zheng Liu and Mark Spiegel, say age differences explain about 61% of the valuation changes that occurred between 1954 and 2010. They determined this by first calculating the ratio of adults aged 40–49 to those aged 60–69, which they called the M/O ratio (ratio of middle-age cohort to older-age cohort). They then compared the M/O ratio to the year-end price-earnings ratio for the S&P 500. As the M/O ratio rose from 0.18 to 0.74 between 1981 and 2000, the S&P 500’s price-earnings ratio tripled from 8 to 24. During the past decade, both the M/O ratio and the price-earnings ratio declined.

A reason for the shift is that as investors age, so do their allocation requirements. Older investors are likely to be more conservative, with a greater preference for asset preservation than asset growth. (Though Fidelity’s survey suggests this may not currently be the case.) As a result, bonds would be favored over stocks.

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Discussion

Jeff from New Jersey posted over 2 years ago:

While it may generally be true that older (retired) individuals typically lean heavily upon fixed income investments, the current interest rate environment will likely drive this cohort towards riskier (dividend paying) assets (or emerging markets fixed income). The wildcard would seem to be how long it will be before U.S. inflation and interest rates move significantly higher.


Dave from Washington posted over 2 years ago:

I guess I am one of those boomer (soon to be retired) types, but I am not sure I agree that all dividend paying stocks are riskier than bonds. In my opinion, bonds are "orders of magnitudes" more riskier than bonds, unless of course you believe that interest rates can stay where they are over the next 5-10 years. That is why my bond exposure right now is miniscule. Mainly because in retirement if you ever needed to sell those bonds over the next 5-10 years you would most likely be selling them at a loss, which is not really going to help the already minute interest that they are paying.


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