Baby Boomers, those born between 1946 and 1964, now hold a large and
growing percentage of wealth and savings in America. Equity valuations
will continue to be heavily influenced by this 76 million strong
generation who (along with others) hold an unprecedented $1.7 trillion
in cash on the sidelines. This immense mountain of cash has mushroomed
in tandem with investor anxieties over high energy prices, rising
interest rates and, of course, terrorism. As anxieties slowly wane,
this cash will begin to re-enter the market.
Although as a group
boomers have not been frugal savers, they are beginning to inherit
wealth from a much more conservative generation that did save. A
greater percentage of this wealth is being transferred to heirs thanks
to recent increases in the estate tax exemption, which will supposedly
be eliminated altogether in 2010.
What are the investing patterns
of the Baby Boom generation? Well, we know they were the vanguard of
the great suburban migration. We know that this migration prompted a
surge in single-family home values, strip malls and office parks across
America. And, although there are signs that the red-hot real estate
market is slowing, it is certainly not crashing at this point.
We
know they were committed Internet and technology bulls in the 1990s.
Boomers invested heavily in Nasdaq-type growth stocks, helping to
create the notorious tech/dotcom bubble. We also know that boomer
wealth was crushed when the bubble burst as many investors failed to
allocate their portfolios among different asset classes and failed to
diversify among various sectors of the economy.
We know that the
leading edge of the group, who are reaching 60 this year, is just
beginning to retire and that they expect their portfolios to supplement
retirement income. They expect to continue living the same high-end
lifestyle to which they have become accustomed. Few will be satisfied
cutting back on the finer things. They will not crimp the household
budget to fit a more modest, retired lifestyle.
Many of these
former hyper-growth seekers are still holding on to loss positions from
the 90s in hopes of recouping original cost. Others sold out and may
never return to the growth side of the market.
But, as their
fortunes are renewed with inheritance, they will come back to equities,
this time looking for more certainty ? mostly conservative large cap
equities, paying dividends. They will not return to stocks with shallow
promises of mega gain in the future.
Growth companies are picking
up on this trend, declaring dividends for the first time or raising
their dividends in an effort to hold on to existing shareholders while
attracting new investors. In the meantime, dividend yields on major
U.S. stocks average just 1.8%, far below the 80-year historic average
of 3.9%. There is certainly plenty of room for dividend increases.
Stocks
that heed the call for beefed-up dividends will enjoy higher prices as
boomers trade in capital appreciation for increased dividend income.
This is especially true now with the more favorable 15% tax rate on
dividends - another strong impetus in the shift from growth to dividend
stocks.
Despite high household debt, new inflationary concerns,
slowing earnings growth and other factors, stock prices are still more
reasonably priced than bonds, commodities or real estate. So, if you
are evaluating whether to expand your stock portfolio, think of the
impact of a boomer re-entry into the market. This time, however,
boomers will be more conservative, driving the opportunity in higher
income type equities rather than the 90s style, zero dividend growth
stocks.
Ed
Crooks, Chairman of Counsel Trust, Inc., a York, PA-based independent
trust company managing $300 million, has 31 years of financial, trust,
estate and investment consulting experience. Prior to establishing
Counsel Trust, Ed was the Senior VP and Trust Officer for a regional
Pennsylvania bank holding company. Ed graduated from Grove City College
with a BA in History and Economics. He received an MBA in Finance and
Security Analysis from Clarion University. He received the ABA National
Graduate Trust degree in Trust Administration at Northwestern
University. He also graduated from P.B.A. Trust School at Bucknell
University and he holds NASD Series 7, 63 and 65 licenses.
