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Stocks Are an Asset
Stocks are like any other asset, they won’t decrease in value too far before a new buyer comes into the market.
Say you have a rental house you paid $200,000 for and is generating $20,000 in rents annually. With the real estate crash you know the home is at least worth $200,000, but right now you could only sell for $150,000.
If you didn’t have to sell, would you? Or, on the other hand, would you be likely to consider making offers on other local homes for $125,000, which, if you could still receive $20,000 in rents would give you an annualized return of 16%, before any future gain, or other tax considerations.
Likewise in the markets, a stock paying a 5% dividend today, so long as its earnings support that amount, would only fall so far before buyers invested their capital. In a market crash, we’re likely to have low rates like we have today, and capital doesn’t want to stay long in 0.5% yielding savings accounts.
Offsetting any part of their sales for distribution reasons are the growing number of the offspring who save, and younger cohorts saving the maximums to these plans in the years before retirement. These individuals are packing money into stocks and stock funds, and the majority stayed that course in the downturn.
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Robert Schmansky, CFP(r), works at Northern Financial Advisors, Inc in Franklin, Michigan. A student of personal finance, Rob holds a Masters Degree in Economics, and post-graduate certificates in financial planning. Rob has been an adjunct instructor of CERTIFIED FINANCIAL PLANNER(tm) courses, and speaker to military families on personal finance issues. Rob writes on financial literacy and investments for his blog Sound Advice.
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Bob
I think that your article was very good but destroyed by the way that it was edited. You aslo know that for every point that was countered by you that the propeonents could have bored us with more words.
The point is that retirees are not selling en mass and converting to cash ( at least not as of now) and excepting a complete paralysis of the government ( wait until next election day}it is unlikely that will occur.
Investors do not always ignore valuations and I dont think that retirees will spell the doom of the equity market,
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Robert Schmansky, CFP® replied 5 months ago
I appreciate the comments Morris.
We'll probably always deal with a choppy market around times like you mention, but in the end, as you note, investors don't always ignore value, and retirees simply aren't all of the mindset of some of the authors who wrote about this recently (an aside, the link with the Bob Powell article on the subject was published after I sent this in, so I did not consider those opinions, but it does offer greater insight into the two sides)...
I suppose I was one-sided, but the articles I was referring to came from a few finance experts who simply accept the idea of a crash as a given. So my goal here was to share why it's not... whenever we're told to be 'sure' the market will react one way, it seldom does...
I know FiLife appreciates the feedback. I kind of liked the layout, though they wanted to experiment, so probably recognize that not everyone will... perhaps not so many sections may work better?
Boomers may create selling pressure but I'm far more concerned by how under-saved these people are for retirement. You can't sell off what you don't have.
Folks who are well-saved for retirement won't do "crash selling" b/c they won't need to and will likely keep a longer-term, multi-generational view of their assets. More conservative mix, to be sure, than when they were 40 or 50 years old, but unlikely to be 100% in cash or something similar.
Folks who aren't well saved for retirement will turn to the government for a handout...and that when the real trouble will hit.
My $0.02.
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I personally found the separation into so many sections distracting, FWIW. Other than increasing pageviews and ad clickthroughs, I'm not sure what the rationale would be for cutting a piece of this length into seven sections.
Substantively, I think the main drivers of investor behavior going forward (including boomers and other reitrees) will be factors other than savings and consumption patters. We're currently in a period of almost unprecedented uncertainty, unpredictability, and anxiety concerning market and investor behavior. Investors still recovering from the horrifying March 2009 market lows. The savings rates you mentioned are held artificially low via government intervention, making alternatives to equities less attractive. More generally, massive, ultimately unsustainable government intervention is altering market behavior in ways that no one can fully assess.
I'm bearish on equities for reasons that stem beyond the scope of a comment on your piece. But FWIW, I agree that those focused specifically on baby boomer behavior are looking in the wrong place.
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