Vanguard Debunks a Widespread Myth about the Market


For at least the past two decades, we have been hearing about an approaching day of reckoning for the stock market prompted by retiring baby boomers selling their equities to fund their retirement needs. Recall that the baby boomers are defined as those born between 1946 and 1964, so they first started turning 65 in 2011, and they will continue turning 65 at a rate of about 8,000 per day. So when can we expect this massive demographically-inspired downturn to begin? A new whitepaper1 from Vanguard Research tells us not to hold our breath.

The first reason not to worry is that the boomer generation spans two decades and there is no logical reason for them to act in concert. Thus, if they were to engage in a large rotation out of equities, it is something that would occur gradually. Furthermore, even when boomers decide to dispose of their equities, they do not necessarily have to sell them, as they can gift them to loved ones or to charities (which may or may not sell them). Even if they do sell them, there is no reason to assume that they won’t find a willing buyer and thus have to accept a reduced price (more on that later).

The second reason centers on the share of total equity owned by boomers. As of 2010, it was about 47%, according to the Federal Reserve’s Survey of Consumer Finances.2 What is so interesting about this number is that it is almost the identical percentage that was owned by the generation prior to the boomers in 1992.  This means that we have already run this experiment, and while there were two substantial drops between 1992 and 2010, neither of them was attributable to retirees deciding that it was time to sell. Furthermore, over the whole period, the share of total equities held by that generation stayed essentially constant. Those who believe that the boomers are going to behave differently from the World War 2 generation offer no explanation as to why.

The third reason we should not expect an enormous sell-off of equities is that most of the equities held by the boomers is concentrated among relatively few of them. Specifically, the top 10% hold 88% of all the equities owned by the boomers, according to the same Federal Reserve Survey of Consumer Finances. Many boomers have sound financial reasons to hold on to their equities such as gaining a long-term hedge against both inflation and longevity risk. Again, there is no compelling reason for them to suddenly become more risk- averse compared to their predecessors at the same age.

An important development that has occurred in the financial markets over the last two decades is globalization. The authors of the Vanguard whitepaper cite data from the World Bank and U.S. Bureau of Economic Analysis showing that foreign ownership of U.S. equities tripled from 7% in 1990 to 21% in 2012. Thus, if the boomers should decide to become net sellers of equities, there is now a large group of buyers to accommodate them.   

To put the icing on the cake, the authors conducted a 78-year study of the relationship between the percentage change in retirees and equity returns. They found no significant relationship. Demographics were found to explain less than 6% of the variation of equity returns. The whitepaper concludes that investors should avoid making drastic changes in their long-term strategic asset allocations based on speculation about how a generation might behave. We could not agree more. While the demographic and financial challenge posed by baby boomers taking Social Security and Medicare is substantial and will require careful political consideration sooner rather than later, it is not a factor that should affect anyone’s asset allocation.


1Wallick, Daniel W., Julieann Shanhan, and Christos Tasopoulos, 2013. Baby Boomers and Equity Returns: Will a Boom in Retirees Lead to a Bust in Equity Returns? Valley Forge, PA: The Vanguard Group.

2Survey of Consumer Finances, 2012. Federal Reserve Bulletin 98(2, June).