What Demographic changes can mean for your investments.
by Dave Thrifty
In this article I’ll show you what demographic risks you should look out for and what effects they can have on your portfolio.
Declining Investment in Equities
A study by researchers at Yale and the University of California indicates that population shifts can have a significant influence on investor behavior and equity values. The study says population estimates are relatively reliable and the group that generally invests the most (the older generation) will move increasingly into retirement and out of equities.Indeed, the baby boomers were largely responsible for the "roaring '90s" in which equity investment was so profitable. The big investors, middle-aged people between 40 and 59, will decline in number constantly - at least over the short and medium term. This could leave a chasm in the demand for investments.
People Moving Across Borders
Despite the challenges posed by an aging population, it is feasible that investment and consumer behavior may change for the better as a result of large influxes of immigration. A country such as the United States already has substantial immigrant flows, and will have less to fear than other countries with lower immigration rates. This trend may alter too, and the ultimate result depends partly on the extent to which influences from America or continental European countries spill over into the whole of North America. The “Donald” may well have a big influence here.In any event, these demographic trends not only create risks, but also opportunities. A clear implication is that investors may want to focus on emerging markets and regions where demographic trends differ from those back home.
Changing the Way You Look at the Future
Peter Temple, a writer for Interactive Investor in the U.K., draws further conclusions for investments in his article "The Long Term" (2002). He points out that the aging population and the pension time bomb create an obvious link to healthcare and financial services. However, he warns that this does not automatically mean that buying stocks from the major drug companies or health sector funds are smart investments - many are yesterday's winners.
Temple says tomorrow's winners will be companies that provide a variety of cost-effective services to elderly people and pensioners. These services extend from medical treatment, care homes, travel and anything else focusing on that specific target market. The large number of pensioners who are relatively poor suggests that luxury services may not make the best investments. However, firms that produce medical and orthopedic products for the aging will do a roaring trade if prices fall over time.
Watch the Trends Closely
It is difficult to project prevailing demographic trends and their impact on future asset values. However, it is less difficult to monitor trends as they evolve and to rebalance your portfolio accordingly over time. Furthermore, such ongoing vigilance is essential in view of the major changes in the investment landscape that inevitably will result from the relationship between birth, death and what happens in between. While no investor can accurately predict what the coming decades will have in store for the financial markets, there are few strategies to consider trying if you believe that the boomers' retirement could weigh on the marketplace.
For example, you should monitor population trends in any country in which you invest, particularly the developed regions like North America and Western Europe. If the investing public continues to decline, consider reducing your investment in equities in general. Certain types of bonds and other asset classes like hedge funds might provide lucrative alternatives.
At the same time, consider going overweight on budget healthcare and related services or products in these aging-population areas. Also consider investing more in equities and property in dynamic economies where populations are rising and remain youthful. Asia and parts of South America would be the prime targets in this case.
The Bottom Line
If you're concerned about this effect, you'll need to keep observing these trends so you can be prepared to act on them if necessary. Demography is always in flux, and so is the investment opportunities associated with it.
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