Risks Associated With Demographic Trends

If you keep up with current events in the United States — which should be relatively safe to assume as you are a reader of our articles — you know that there have (and continue) to be significant demographic changes across the nation. For example, the generational population gap. According to Pew Research Center, as of the year 2016 Millennials (ages 18-35 in that year) had become America’s largest living generation. It was estimated that there were 79.8 million Millennials compared to only 74.1 million Baby Boomers (ages 52 to 70 in 2016). While the different types of demographic changes are important to understand, what might be even more significant to you are their implications regarding investment risk and returns. Simply put, how demographic trends could affect your portfolio. Ultimately, though, since there are many factors at play such as the combination of the constantly growing number of pensioners, ever-declining birth rates, and continually increasing movement across government borders (to name a few), which could have tragic consequences for pension plans and wealth creation, you might want to think about accounting for these changes. Here is a more detailed look at two of the most notable trends and how they could affect your portfolio:

The Aging Baby Boomers:

According to the U.S. Centers for Disease Control and Prevention (CDC) and the Administration on Aging (AOA), there will almost certainly be frightening implications of the growing population of senior citizens. In fact, it is estimated that by the year 2040 the number of people over the age of 65 will account for almost 21.7% of the total population in the United States. For reference, that number would be a noteworthy increase from 14.9% in 2015. As result, some economists believe that the massive increase in the elderly population will cause a sort of “asset crisis”. By this, they mean that the amount of Baby Boomers retiring will outweigh the number of young people by a considerable margin. Further, this could result in an economic emergency as the older generation would be converting their investments to cash, while the younger individuals, who typically consume rather than save, would reduce the demand for many kinds of investments. In the end, if this scenario comes to fruition, it would probably lead to a terrible decline in asset values (including equities, real estate, and bonds). Moreover, such a scenario could take multiple decades to rebound from.

Movement Across Government Boarders:

Although the potentially harsh reality of an aging population might seem scary, there is a possibility that investments will change for the better due to a considerable inflow of immigrants. Furthermore, this is especially true for countries like the United States that currently have large immigrant influxes — as they will have less to be worried about than countries with already low immigration rates. Additionally, the collaboration between different cultures could lead to positive business cycle trends. For instance, such trends might include increased entrepreneurship, creativity, and advances in technology. Amazingly, if this were to be the case, these trends could be more impactful than the population changes — resulting in economic growth.

By and large, perhaps the most important takeaway here is that while demographic trends can create risk, they can also produce opportunities. As such, to further explore this in real time, it could be beneficial to study the economies of emerging markets or other regions where demographic trends are different than they are in the US. Who knows? Learning about foreign trends might help you predict how society will change domestically. All things considered, demography is ever-changing and so are the associated investment opportunities. If you are able to observe the trends and correctly prepare for them, maybe you can turn them into great tools for profit!