dwot (99.49)

What Are You Saving/Investing For?

May 02, 2009 – Comments (4)

It seems to me that the answer to this question for most people is for a home or retirement, and these are both areas in the economy that have become disasters.

I have several people question me for investment tips and what would I recommend for self improvement, and there is just so much that comes from so many different sources that I suppose being very broad based, meaning I know a little about a lot of thing, is the foundation.

But sometimes there are things that do stand out and for me a single course in economic history has been one of the most defining courses I ever took in terms of how it has guided me.  I remember being quite critical at the time questioning how the study of slave and serf economies was ever going to be relevant.  But studying the rise and fall of economies and the events that surrounded them and how those economies responded or broke down has proven to be very useful in broadening my evaluation of today's events.

Economic history keeps bringing me back to the aging population and world population.  Prior to studying economic history I was influenced by the media's assessment of why women have been having children later and later in life, a trend that has been happening for about 40-50 years now. The popular reason being promoted at the time was that women were spending more time on developing careers and certainly I do believe that is part of it, but deeper, why are women all of a sudden developing careers?  

What economic history showed me is this is not the first time this trend has been seen and it always comes around tougher economic times, when people struggle more to get established.  When I was 18 working in the banks practically everyone in their 30s owned their home and many were close to paying it off.  Indeed, being mortgage-free by 40 was a common expectation and goal.  And these people had their children fairly young.

Economic history showed me that there were several times that the age to start families went to the late 20s or early 30s.  Farms had been divided to the point that they could not be divided anymore so young people tended to stay at home until a much later age.  How does history repeat itself?  We've had a trend of younger people staying home longer and jobs simply are not paying well, nor are they secure. 

Looking at economic history has made me consider more what I expect to happen when I pull together the pieces of the various demographic groups, their economic challenges/wishes and where they've come from and where they probably want to head towards.

So today we have an aging population that is thinking about retirement.  Relatively speaking there is more people in an age where they've had time to become somewhat established and free up income for saving for retirement then at any time in recent memory.  I tend to think that the savings rate going down is related to the increasing inability to get establish as you go down the age demographics, but if you evaluate by demographic group you see enormous difference by age.  This is 7 years old now, and British, but it is the same thing that is happening, wealth distribution is changing and it is not favoring younger people.  How do you save when your expenses are higher and your income is lower?

So what happens as this bulge of people with the ability to save ages and is followed by a group with a declining ability to save?  As people retire their income declines and now the priority is to manage wealth to provide an income for the rest of one's life.  That tends to mean no more savings and some selling of assets.  So in terms of supply and demand, you have less demand for assets and more supply coming onto the market.  It means the valuation of assets has to decline.

The other thing that I see happening is how the transfer of wealth plays out as parents die and their poorly established adult children inherit.  My friend 15 years old then me, and well established, tended to hang onto her mother's assets when she died.  Imagine someone inheriting that still has a big mortgage.  They are more likely to want to free up cash and pay down debt, so this will also increase the sale of assets.  Some assets come with costs, like a vacation home.  These will be sold when budgets are already tight.

I simply do not see how assets, whether in housing or the markets, can hold the same levels of valuation as the demographs change and those that are the biggest group of savers retire and there is a group more interested in debt reduction that is following.  It just seems to me that there will be a huge decline in the competition to purchase assets over the next 20 years.