Friday, July 26, 2013

Change in demand for asset class driven by the ageing population

The old theory of investment went something like this: You can afford to own a higher risk portfolio of investments when you are young because if they go drastically wrong then you still have enough time to repair the damage (i.e. work and earn some more money). This changes as you age. The conclusion being that your portfolio should move to assets with less risk as you age.

Now the guy who advises me says that the recent financial meltdown and the prolonged period of consumer and government debt that lead to this has turned that argument on its head. Government bonds are now have more risk than equities. He argues that Greece might flounder into economic meltdown and hence their bonds are worthless but people are still going to need to wash their clothes and eat food and hence the equities of long well established companies will continue hold their value. That is an ultra simplistic summary of the argument.

The FT has an argument that says exactly the opposite. Sorry but it is behind a paywall. An extract from the article says:
The theory – based on decades of academic research – is that when wealthy people reach retirement they tend to shift their personal investments away from risky equities and into the more reliable sovereign and corporate bond markets.
“Bond markets tend to benefit from ageing populations relative to equity markets,” says Douglas Renwick, director at Fitch Ratings.
And the population in the industrialised world is ageing dramatically. While those over 65 accounted for 12 per cent of the population in 1982, this has risen to 16 per cent now and is projected to reach 25 per cent by 2042.

So who do you believe?

I have no idea. Dick Stroud

1 comment:

Richard Ciechan said...

A lot depends on your potential need to access your capital.

If financial investments are just one part of your overall wealth/income generation, for example if you have a DB pension, you continue to work, or you have, say, buy-to-let income then continued holding of equities makes perfect sense. Paradoxically a good spread of shares produces a more stable income stream than interest bearing investments which go up or down depending on prevailing interest rates. Over time, if you can sustain the risk, equities will also provide a higher and growing return.

If, on the other hand, you may need to convert your wealth to income, say purchase an annuity, then you may not want to take the short term risk that equities have at any particular time.

A balance may be income drawdown.

Obviously, the overall topic is more complex than the above outline.