by Archie M. Richards, Jr., CFP^®
August 4, 2003

During a recent speech of mine, a gentleman in the audience asked how the stock market would react to the retirement of baby boomers. (Baby boomers are Americans born in great numbers between 1946 and 1964. The oldest will reach 65 in 2011.)

I replied, "I don't know" and proceeded to answer other audience questions. But I felt badly about being so abrupt.

I have since thought about how the stock market will react to baby boom retirements. And the answer is . . .

I still don't know.

But there's more to it than that. The year 2011 is pretty far out - 8 years. Jeb Bush will be gearing up his campaign for reelection. (Just guessing.) The boomers will leave the work force, which could be bad for the economy. But fabulous new technologies will create less need for employment, which could be good for the economy. Nobody knows the answer to the gentleman's question - not now and certainly not me.

Never mind 8 years; in financial markets, we don't know what will happen in the next 5 minutes! If we did, we could make a quick succession of correct moves and come out billionaires with no trouble at all. That's impossible, because the market doesn't let stock values get too far ahead of the creation of wealth by real people and real machines doing real work.

Oh, we can look at long-term political and technological trends and get some idea of where stock prices might stand in 8 years. (Pssst, higher.) But details like the effect of baby boom retirements are too hazy to handle.

Besides, the market knows the answers before we do. The guesses of the millions of participants in the stock market are more accurate than the predictions of any one of them. Expectations are built into stock prices. The market discounts information in advance, usually correctly. Corporate earnings, for example, are taken into account by price changes 4-to-6 months ahead of when they appear as hard news. Future demographic changes are probably discounted years in advance.

Pondering questions of a hazy nature might be entertaining. But coming up with the answers has no practical value. This is why my response to the gentleman was so abrupt. The answers to all such questions, if indeed they can be known at all, are useless for investment purposes. But I didn't want to offend the questioner.

He may have asked the question in hopes that he might know (or I might know - what a laugh!) the investment effect of baby boom retirements before others do. He could buy or sell stocks accordingly and make a ton of money, right?

He can't. By the time he or anyone else becomes aware of the correct answers, stock prices will already have moved. To the market, the knowledge investors are just learning about is old hat.

The gentleman does himself harm if he treats such conjectures as anything but amusements. If he acts on his answers, he will probably act wrong, because the market will already have taken the correct answer into account. He'll be too late.

It's okay to buy and sell occasionally to rebalance a portfolio. If an investment segment has made a big move up or down, bring it back to your intended percentage. Rebalancing is an automatic system for selling high and buying low - no crystal ball required.

But buying and selling because of detailed expectations of the future will almost certainly boomerang and worsen your investment results. The market is smarter than we are. Except for rebalancing, just buy. Unless you need the money, don't sell.

The Economist estimates that in 1979, when Saddam Hussein assumed power, Iraq's gross domestic product per person was $12,000. Twenty-three years later, in 2002, Iraq's GDP per person was only $3,000. The numbers are adjusted for inflation and tallied in constant 1996 dollars. The annual "growth" during the period was minus 8 percent.

The key determinant of economic growth is the political environment within which the economy operates. Iraq's political environment was . . . er, the pits.