Friday, June 03, 2005


One of the arguments to justify the current low level of long-term bond yields is demography. In the developed world, the number of over 65’s is set to rise dramatically and this group will invest their savings mainly in bonds and other fixed-income instruments.

Sounds like plain common sense. Stocks are an uncertain investment in the short and medium (less than 10 years) and people over 65 years shouldn’t be fooling around with that kind of risk.. However, people don’t always behave or invest rationally.

Take the 2001 Survey of Consumer Finances, carried out by the Federal Reserve. It shows that 21% of families whose head has over 65 years of age have direct holdings of stock, basically the same proportion as the total population. In the over 75 years group, these holdings amount to 27% of all financial assets, the highest proportion of any age group.

Taking only identifiable financial assets (meaning those that are not managed by others, such as mutual funds, retirement funds, life insurance, etc.), it turns out that directly-held stocks represent around 50% of that total in the geezers’ case, a similar proportion to other age groups.

Obviously, this data set has limitations. It’s impossible to break down managed assets by type of investment, so its possible that these holdings will be increasingly oriented to bonds. Nonetheless, the main point stands: old people are not noticeably less risk-averse in their investment choices.

It’s something I’ve seen all too often. I have relatives who still play the market well after retirement age. One was even suckered into investing in tech stocks at the height of the dot com bubble. Greed doesn’t decline with age.

Research seems to back the argument that demography plays a modest role in total and relative demand for different types of assets (see this paper). Actually, if you want to profit from the geezerification of the world, read this study (hint: the secret is in the sectors).