Some investors may be wondering how the aging baby boomer generation—many of whom are at or near their retirement age—might impact the investment landscape in the future. Baby boomers control a lot of wealth in this country and the decisions they make regarding that wealth may significantly affect certain asset classes and market sectors.
The Effect on Asset Classes and Market Sectors
One of the potential outcomes of an aging class of investors is a gradual shift from stocks into bonds. That sort of asset allocation change assumes the traditional wisdom that people at or approaching retirement generally reduce portfolio risk by selling stocks and buying bonds. While that strategy may occur to some extent over the next decade, some opinions suggest that investors could choose to hold stocks for a while longer. For example, Nicholas Atkeson and Andrew Houghton noted in USA Today that the actual shift may be from a broad portfolio of stocks and stock funds into more narrowly focused portfolios that emphasize dividend income. The idea here is that bond prices are high right now, due in part to the persistently low interest rate environment. If investors don't feel comfortable buying bonds at a time when prices are high and rates are low, they may seek income through dividend-paying stocks instead.
Beyond changes in broad asset classes, certain sectors of the economy may see upticks in investing popularity, as well. Those sectors may include healthcare, travel and leisure, and real estate development firms that cater to the 55+ community. Corporate executives will likely dedicate time and money figuring out the various directions in which baby boomer funds are flowing and attempt to capitalize on them. While it may sound like a fun and potentially profitable experiment for investors to seek out companies that stand to benefit from the aging boomer generation, investors should always keep in mind their long-term objectives and diversification needs when adding to or altering a carefully built portfolio.
The Effect on Investment Products and Vehicles
Baby boomers continue to impact the investment product realm as well, as they seek solutions to common problems. For people who don’t check in with their portfolios often enough, target-date funds have become a familiar fix. These investment vehicles can help people stay on track with their changing risk tolerance and investment objectives by automatically reallocating a portfolio according to a target year. For example, a target 2050 portfolio may be fairly aggressive now since there are 35 years to go. However, it will tone down risk and likely avoid the most aggressive parts of the market as the year 2050 approaches. Target-date investments have become very popular as they remove much of the legwork involved with analyzing and reallocating a portfolio as one reaches retirement or whatever their target-age investment objective may be.
The aging population may also consider certain investment vehicles that offer a combination of income and non-market correlation. Examples of these investment vehicles include Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs). MLPs are limited partnerships that trade on public exchanges, providing investors with liquidity and also the tax efficiency of investing in limited partnerships. MLPs typically operate in the natural resource space and don’t correlate directly with the broader markets because they engage in stable activities, such as transporting and storing oil.
REITs may have a similar appeal in that they provide investors with the opportunity to invest in diverse portfolios of income-producing real estate. Beyond the typically high payout levels, real estate investments are often considered to improve diversification because they have an element of non-correlation to the broader stock market.
Both MLPs and REITs can be purchased as individual securities or through ETF and mutual fund platforms, giving investors the ability to take on individual holdings or utilize a more diversified approach.
The aging of the baby boomer population will likely create shifts in our economy and markets. While investors continue to think about what those shifts may be for the purpose of benefitting their portfolios, it’s important to stay focused on long-term goals and overall diversification. The universe of mutual funds and exchange-traded funds has become so robust that investors have many choices that they can utilize when it comes to selecting products that may help them to achieve their investment goals.
 MLP distributions are typically considered to be a return of capital and are not taxed when received. Rather, your basis is lowered by the amount of the distribution, resulting in tax realization at the time your partnerships units are sold. Taxes on MLP distributions are deferred until the investment is sold, at which point the tax is either a short or long-term capital gain depending on the length of time held.