Scott Burns: Talking about the changing tides in America's generational investors.
Hi there, I'm Scott Burns. We're coming to you from Morningstar's ETF Invest Conference 2012. Joining me today is Liz Ann Sonders. She is the senior vice president and chief investment strategist with Charles Schwab.
Liz Ann, thanks for joining us today.
Liz Ann Sonders: Thanks for having me.
Burns: So, we were having a conversation here on the side about just people's perception around the baby boomers, and that the baby boomers, once they're retired and they're done, that that's kind of the end, that there is no more America. The baby boomers are the end of it all. Is that true?
Sonders: You know I don't think so. First of all, I'm a baby boomer. I am at the very backend of it.
Burns: You don't look it a bit.
Sonders: Well, thank you very much.
It is an odd discussion that we have, particularly as it relates to the market and the demographics of the baby boomers, and when were their peak spending years and peak investing years, and then the drawdown years. So a couple of things odd about it: One, this odd, almost assumption that, as you said, it's sort of the end of the line, and that there's no generation that follows that. But there's the entire echo boom generation, all the way from Gen X, Gen Y and then the Millennials. In fact the Millennials are a larger number than the baby boomers.
Burns: That's just a shocking statistic. I don't think in the general perception out there, I think everybody thinks there is the boomers and then that's it.
Sonders: No, we have the echo boomers coming behind them, and what's intriguing about that cohort--and you can move that into some degree Gen Y too--is that they tend to be bigger risk takers. They, in many cases, certainly the Millennials, were not hit by the back-to-back bubbles in financial crises from 2000 through 2008 or so. So they don't have that psyche that I think a lot of the boomers have of having lived through double bubbles, [which] really changed that generation's mindset about investing.
You didn't have that experience for a lot of the Millennials, and you look at statistics on the percentage that are entrepreneurs, the percentage that start companies, even silly things like the percent that get tattoos is maybe some measure of risk-taking.
You add those things up not to mention the fact that they're automatically investing at a younger age through programs like 401(k)s, where we didn't have that when I started working. And that starts them on the process toward investing at an earlier age. So I think you have to be balanced in a demographics analysis of what it means for things like the stock market.
Burns: I think one of the counterpunches I've heard on that is that while they are investing more, they are more savvy, and there is a lot of, I think, risk-taking in their personal lives, unemployment seems to be a problem there. So, it's really hard to save in your 401(k) for the job you don't have?
Sonders: If you don't have one, right. Look, and then there's the big debate as to how much of that is a cyclical problem and how much of it is a structural problem.
I think, a lot of it is cyclical. Cyclical in the sense that we're still in a post debt crisis, deleveraging cycle. It is going to take some time to rebuild these jobs. The structural piece of it, a lot of that has to do with training and education, the mismatch to some degree between the jobs that are out there and the skills that have been fostered, and that also takes a little bit of time, but it's not a permanent problem. It's one that you go through a transition that takes several years, but it's not something that's with us in perpetuity.
Burns: If you're looking for tailwinds for that Millennial generation, do you think the boomer's exiting the workforce, although it sounds like that's going to happen at a much slower rate than I think we once thought, does that create some more pull demand for this younger generation then?
Sonders: Oh, I think so, and there's a lot of money in the hands of the boomers, and you've got the inheritance effect, and not every boomer is in mass liquidation mode. So, many Millennials will be inheriting portfolios from their parents, so that establishes an investment base for them. None of this is to suggest that because of my own sort of different demographic analysis, that I think we're at the beginning of a massive new bull market and bubble in equities. I just think, again, it's an attempt to be a little bit objective in demographic analysis as it relates to the stock market.
Burns: I totally get that, that the bottom isn't coming out…
Sonders: Not only that, but I think, many of the boomers bailed, to use a market term, during the '08-'09 crisis. This thought that they're just now starting to consider liquidating some of their assets, I think a lot of that de-risking already occurred. It was sort of forced up on them by virtue of the severity of the financial crisis. So, I don't know that we still have this wave of liquidation to come. I think a lot of that already happened.
Burns: What if I told you, if we look at the whole mutual fund market, consider that a proxy, which has got some flaws in it, but you add in ETFs, you add in money markets, the total average investor right now in the U.S. has a 60%-40% portfolio, equity to fixed income. Does that jive with what you think the demographics would kind of tell us if we put a glide path for that demographic?
Sonders: I find too often that advisors try to come up with what a cookie cutter proper allocation is for a certain cohort, and oftentimes, it is driven by age. So you look at, you're in the peak savings, peak investing, and peak liquidation years, and you apply what would be perceived to be a normal allocation to that.
And I think there's a problem with that, because too often investors make that decision based on age and time horizon when in fact their risk tolerance doesn't necessarily match their age or time horizon. I know plenty of much older investors that have a very high tolerance for risk and they're sort of gamblers by nature and they love to have a more risk-tolerant portfolio, and I know plenty of young investors who don't want to lose a dime.
So, I think the asset allocation analysis has to come into play there. When you look at big-picture studies of exposure to equities among households and exposure to bonds among households, right now actually, household exposure to equities and to bonds is a little bit north of long-term allocation, but I think that's as much explained by the fact that you get effectively 0% returns on cash, so that money is gone to try to find the income somewhere outside of that traditional.
So there are a lot of unique things that are happening right now in this 0% interest rate environment that I think skew some of those asset allocation numbers.
Burns: I definitely agree with you, and the weight of this 0% interest rate, I think, with some of those demographic reality checks are going to be really important for people to think about.
Sonders: Well, it's extremely important, and there's so much discussion certainly by the Fed as to the benefits of very low interest rates, but we know that the benefit is really there for the borrower, not for the saver. If you look at the entire private sector and basically net out the savers from the borrowers, the net effect of a 0% interest rate environment is negative, because we have a greater proportion of the private sector that are net savers as opposed to net borrowers.
So, again, the overall effect is a drag. We know, though, the focus is on trying to generate some borrowing interest, and it goes beyond just the private sector, but I think that's one of the things sort of missing in this discussion of the benefits of what the Fed is doing here.
Burns: Got it. Well thanks a lot of your insights on that.
Sonders: My pleasure.
Burns: Again, I'm Scott Burns, coming to you from ETF Invest 2012.