A generation of investors has been converted to the gospel of equities: Stocks may rise or fall over the short term, but over many decades a diversified portfolio will be the ticket to retirement heaven. The chief prophet of this belief has been Wharton professor Jeremy Siegel, and its bible has been his 1994 book, Stocks for the Long Run.
But now, based on the reaction to his new book, The Future for Investors, many are wondering whether Siegel has renounced his faith. A front-page story in the Wall Street Journal last week depicted Siegel as preaching that stocks are going to get “crushed” in a “market meltdown” 20 to 40 years in the future when baby boomers retire and sell their equity positions.
The idea is that as the American population ages, there simply won’t be enough young people to stuff their 401(k) accounts with stocks to accommodate the enormous baby-boom generation as it cashes in. In other words, when it’s time to sell, it will be like the punchline to that old Wall Street joke: “Sell? To whom?”
I haven’t read Siegel’s new book, so I’m unclear about his actual view on this. But I find it hard to believe that the man who has preached the gospel of equities for so many years has suddenly turned heretic. And I’ve never known Siegel to use inflammatory language like “crushed” and “meltdown.” Perhaps the Journal got a little carried away for dramatic effect. I’m not sure.
Be that as it may, we’ve heard versions of this same concern before. It’s part of the “demographic doomsday” school of economic catastrophism, a staple ingredient in those books that seem to crop up every couple of years with titles like How to Have Fun in the Coming Great Global Mega-Depression of 2030.
To have this kind of thing surface again right now fits right into a theme I’ve been writing about in this column for several months: The pervasive sense of hopelessness that hangs over the stock market. I see it as a great opportunity. Stocks are always a buy when the gloom is the thickest.
In my view, whether or not Siegel has in fact lent his good name to this particular paranoid fantasy, a fantasy is indeed all that it is. Fear not. The world several decades from now will no doubt be very different than today’s, but there’s no reason to think that everyone is going to sell their stocks all at once, or that you won’t be able to find buyers for your stocks.
It’s almost certainly the case that the US population will get older, on average, over the next half century. The rate of population growth may very well slow at the same time. Those, by the way, are the main reasons why Social Security and Medicare will become insolvent unless something is done to restructure them.
But just because Americans get older doesn’t mean that they are going to sell all their stocks. It’s just not the case that American stockholders consist entirely of middle-class workers with 401(k) accounts who accumulated stocks when they were young and will robotically sell them off the moment they turn 65.
For one thing, one of the reasons why America is getting older on average is that people are living longer. As people live longer, they will no doubt wish to hold stocks longer. If you still feel young at 65 — and have, say, 40 more years of life to look forward to — then you’re going to be willing to take the risk of stocks in order to seek higher returns for more years.
According to the Journal story, Siegel suggests that people may also wish to work longer as their lifespans expand. At the moment though, if anything, Americans seem to be choosing just the opposite — to retire earlier and earlier.
Whether or not you work longer, it’s the case that no matter how old you are, you won’t necessarily want to sell all your stocks. Unless you plan to die broke, you may want to hold stocks into your old age in order to pass them on to your children or grandchildren.
Moreover, while more Americans now own stocks than ever before, it’s also the case that a very large portion of stocks are held by a small fraction of the wealthiest American families. If you’re a gazillionaire, chances are you aren’t going to feel any need to sell your stocks just because you’ve reached some particular age. Hey, ask Kirk Kerkorian. He’s 87 years old, and he’s buying not selling.
Also, it helps to remember that America isn’t the only country in the world. By the time the biggest contingent of baby boomers retires, it could well be that America isn’t the world’s largest economy, either.
Perhaps the aging boomers of 2040 will hold portfolios consisting of stocks from around the world, including large positions in companies based in China and India — companies that don’t even exist today. Perhaps if those boomers want to sell those stocks, they’ll sell them to young people in China or India. Siegel makes much the same point, according to the Journal.
I admit there are a lot of unknowns here. We’re talking about incredibly large-scale and unpredictable trends in lifespans, lifestyles, the distribution of wealth and the character of the global economy. So if you’re of a mind to scare yourself silly, there’s lots of room here to construct a scenario that will do it.
But just because something bad might happen doesn’t mean it will. And if you plan your investments today assuming only the worst-case scenario, I can guarantee that you’ll have an inadequate retirement — because you won’t have taken enough risk, and won’t have earned a high enough return.
Besides, if markets are anywhere near efficient, then none of this matters. Markets can read Siegel’s books and scare stories in newspapers. If there’s any truth to this, then it’s already been fully discounted in prices. The risks you really need to worry about are the ones that take markets by surprise. This most assuredly isn’t one of them.
So don’t sweat the small stuff. Go out there and work hard and invest hard and get rich. If everyone follows that advice, then there would truly be nothing to worry about. Go get ’em, tiger. And don’t believe everything you read.
The above is an “Ahead of the Curve” column published May 13, 2005 on SmartMoney.com, where Luskin is a Contributing Editor.