I’ve heard an interesting theory several times of late. This investing theory explains how the next market crash will happen. This is a bubble that went on for years and nobody suspected it. Have you ever heard how the baby boomers will withdraw so much money from the market to finance their retirement that will generate a massive bear market?
The Theory about the Next Market Crash
Here’s a little bit of rationale behind this theory: The baby boomers are the group of people that were born between 1946 and 1964. It was the most massive wave of newborns since the Great Depression:
These newborns also became the most powerful workforce of the past century. They have built, grown and prospered for many years. The Boomers created a real boom of wealth in the economy. They also put lots of money aside in their pension plans and retirement funds.
But all good things come to end and soon these boomers will retire (some of them already have). Boomers are also known for their good lifestyle and once they retire, they will want to maintain it at a high level. This is why they will withdraw massive amounts from their nest egg to finance their retirement and high cost of living. Combine this situation with the current demography showing a lot less newborns each year. This means that for every boomer retiring, we have about 1/3 of a worker entering the workforce. This also means that for every boomer withdrawing funds, we have 1/3 of a worker contributing to a retirement fund (e.g. investing money). Considering the fact that most young people are more worried about buying an iPhone 6 than contributing to their retirement fund, we may even push the math to 1/4 or 1/5 of a worker investing for every boomer retiring!
What happen when investors start to withdraw funds massively from the market? It becomes a sellers’ market or a bear market if you prefer. Companies may continue to bring in the numbers and grow their profits, if there are more people to sell their stocks than to buy them, the stock will drop accordingly.
Is This The End of Our Bull Market?
When I first heard of this theory, I was a bit skeptical. I mean; it all makes sense but any simplistic theory about something bad that’s going to happen is always hiding part of the truth. This is why I dug further to find out if we are really going to see more sellers than buyers in the future? Will the pension funds be forced to sell too many stocks and push the market down?
The short answer is no; there will not be a bear market because of the boomers. The situation is not that bad for one reason; the huge stack of money they are sitting on in their pension plan is generating yield. This investment return will be almost enough to cover for the big wave of withdrawals:
This graph is coming from Stats Can (Canadian data) but it shows how the ratio net cash flow on assets will drop slightly but not enough to create a commotion in the markets. In addition to this graph, I would also add that boomers better be careful with their withdrawal rates as they are retiring early (in their 60’s) and will possibly live for a good 20-25 years. Therefore, if they start selling too much right away, they won’t have enough money saved aside and will out live their savings…
Then again, just another simplistic theory down the drain because of some gurus trying to scare you. You can keep investing, boomers won’t bust our markets!
