Demographics Doom the ‘Great Rotation’

by Alyssa Oursler | April 29, 2013 12:02 pm

When it comes to the so-called Great Rotation — you know, the supposed mass exodus from bonds and subsequent move to equities that many predicted for 2013 — InvestorPlace contributor Dan Burrows said it best:

It’s bull$@#!.[1]

You can take your pick from the list of reasons. Burrows pointed to the recent AP Twitter hack[2] that, in a split second, sent stocks plummeting and T-notes soaring.

Then there’s the fact that the bonds-to-stocks shift presents a false dilemma. While market bulls probably pointed to such a move as the catalyst for this year’s strong first quarter, the reality is that, “Money has been flowing into stocks and bonds — not one asset class at the expense of the other,” as Burrows put it.

The numbers back this up. According to Thomson Reuters data[3], equity funds have taken in $117.8 billion so far this year, while bond funds have eaten up $115.7 billion — both pretty hefty numbers, and both pretty equal — hardly a sign of a mass exodus from fixed income to equities.

But there’s another often-overlooked reason why the Great Rotation hasn’t taken hold and ain’t coming anytime soon: demographics.

There are three things to consider here:

  1. The amount of money in different age groups’ portfolios.
  2. Their allocation to bonds.
  3. The number of investors in each age group.

And all three points fly in the face of a Great Rotation.

It’s a simple reality that the older you are, the more money you have saved. This is the natural result of the fact that you’ve had more time to build up your retirement income, whether through an IRA, 401k, pension plan, what have you.

In a Daily Finance survey[4], the amount of money that respondents had saved in such investment vehicles (as of late last year) increased with age. For those 25 to 32, the average amount was $37,000, while the median was $12,000. For ages 33 to 44, the average amount roughly tripled to $157,000, while the median jumped up to $61,000. For those 45 to 54, things kept growing. The mean was $219,000 while the media was $101,000.

The age groups stop there for that particular survey, but the trend is clear … and makes perfect sense. The older you are, the more you’ve made throughout your life, the more you’ve invested, and the more you have in your nest egg.

Which brings us to the second point: At the same time, the older you are, the more conservative your investments are likely to be in an attempt to protect what you have saved … and that means more fixed income in your portfolio. According to U.S. News & World Report[5], for example, 401k investors in their 20s, 30s and 40s have 7% of their portfolios in bonds, while that allocation jumps to 9% in their 50s and 10% in their 60s.

It’s a one-two punch: Bonds don’t just make up a larger slice of the pie for older investors, but a larger slice of a larger pie. Meanwhile, younger investors — who have more time to build up their portfolio and generally have a greater appetite for risk — have less money to allocate in the first place.

In this sense, the natural rotation into fixed income that comes with age should, at a minimum, offset a substantial rotation in the other direction.

And that’s before even considering our third and final point: That what we’ve just discussed involved generations that are equal in size.

They’re not.

Aging Baby Boomers abound. From 1946 to 1964 — the years of the boom — there were 76 million births, and the first of that group reached retirement age two years ago. In the nearly two decades after, for comparison’s sake, the number of births dropped by 10 million — a 13% fall.

So the older generation not only has more money and is apt to be more conservative, but it also is larger in number.

That might not spell a golden age for bonds, but it certainly decreases the likelihood of a huge shift into equities.

  1. It’s bull$@#!.:
  2. recent AP Twitter hack:
  3. According to Thomson Reuters data:
  4. In a Daily Finance survey:
  5. U.S. News & World Report:

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