A 30-Year Stock Market Crash? Yes Please!
The other day I came across another article reminding us of how retiring baby boomers are sure to be selling stocks for a long time to come, possibly driving prices down. I scanned it quickly to see if it had any actual new evidence but apart from mentioning a Federal Reserve study it was the same as usual.
What if the worst comes to pass and the stock market actually declines for 20 to 30 years, or crashes and stays flat for that long? That would be a big win for me! To clarify that, I don’t plan to hold anything back from my investments and may be taking income periodically from my portfolio well before 30 years from now. So it’s not just that it would be a better price to buy at. But this could still be a good thing. Why is that?
Imagine a broad market index with a dividend yield over 5%. Imagine that you get paid in cash every month for holding hundreds of stocks without having to analyze them. Not only that, but you can re-invest it (when you aren’t taking the income) to buy more of the same stocks with the same dividend, giving you compounding income that you can see every month. I would imagine the earnings yield would still be well above the dividends, which would lead to good appreciation potential once buyers overpowered sellers again. This sounds like a dream, being able to really invest and not “send out distress signals and scan the horizon for Ben Bernanke”, as another article this week put it.
There are a number of reliable sources pointing out the potential downward pressures of the boomer effect, although there are many others who point to reasons it may not affect the market. Two of the main reasons given are that with long retirements and large portfolios baby boomers will be keeping their stocks for a long time and even leaving some as inheritances, while at the same time growing young investor classes in emerging markets will be buying more of our assets. The first reason does make sense and many could slow down their spending if they can’t all sell their stocks at once. The second reason will likely take longer to play out than some people expect, but could eventually be a force.
The market could go down, which would be good, and it could go up, which would be good. The news reports, focused on repeating the experience of 1985-2000 without thinking about why it happened, often ignore a lot of real opportunities. Eventually they will report on what’s successful in the new market 20 years after it happens. I’m not saying that investing in stocks can’t fail. If they stay at their current levels for 30 years that might be the worst outcome. But as long as the business environment continues to improve there is a lot of potential regardless of where the market mood swings may go in 30 days or 30 years.
The Value Indexer Blog 
That Federal Reserve study you mentioned has already been shown to be deeply flawed. Yes, it’s true that we baby boomers might be selling our stocks to fund our retirements and thus theoretically putting downward pressure on prices but … what the study ignores is that we have the rising countries of India and China etc with more millionaires and billionaires in the offing over the next 30 years than the USA could have ever dream of. As aging American investors sell their shares and, by implication, drive stock prices down then young and wealthy Asian investors will see bargains developing and step in to buy up those same shares thus supporting stock prices from becoming undervalued.
Asian investors aren’t stupid; they will know bargain prices when they see them.
Thanks for the comment Mark! There are many factors that such studies likely ignore, and others that we don’t know about. Sovereign wealth funds might decide to move from owning foreign currencies to owning foreign productive assets (and even owning whole countries if you believe the more extreme views). With a larger part of the world having access to the market it’s more difficult to predict where it will go. I’ll be doing my part to support the markets 🙂
I think what annoyed me about the study was the almost arrogant belief of the Federal Reserve that it would only be American investors who would be buying and selling American stocks and therefore if American baby boomer investors sold to fund their collective retirements, the American market must suffer. It completely ignored the indisputable fact that we now live in a World market and that there may be just as many (if not more?) investors outside the USA as inside. If a Chinese billionaire in 5, 10 or 15 years time spots that GE (or Apple or J&J) has fallen dramatically in price because baby boomers have sold and is now trading on a forward PE of 6 and yielding 10% (!!), then I suspect the Chinese billionaire will be buying in New York and not on the Shanghai market. Ditto with the Internet Millionaires in Delhi and Hardware Moguls in South Korea and Taiwan and perhaps even Indonesia. Prices will rise until such time that the companies are fairly valued again with PEs and yields comparable to what they are in a “normal” market (whatever that is!).
A valid concern might be that consumer demand won’t be as great as in the past as baby boomers retire and that company profits might suffer as a result, but that wasn’t the point of the Fed study as I understand it.
I guess what really concerned me now that I think about it is that the Federal Reserve was actually capable of putting together such a poorly thought our piece of research. And these are the same guys we are counting on to save the world? Scary stuff.
The Federal Reserve seems like a fairly large organization; they may be exploring some unlikely possibilities just to get a better sense of what could happen but hopefully the top-level decision-making is more focused.