Where do I put my money now?

The Advocate, December 18, 1996

Where do I invest my money today? With interest rates reaching 30 year lows and stock markets reaching all-time highs? As my long-time readers may remember, I stressed caution in my April article earlier this year, "Why Some of Us Want the Stock Market to Go Down". I said that the market was high then. For some who decided to wait, they have sat back and watched approximately another 20% tacked on to an already high market. So much for playing it safe.

We are witnessing another baby boomer phenomenon. The markets are going to begin their seventh year of expansion. This is unprecedented. The longest run previous to this was six years. We are about to extend that one year. What the boomers did to the real estate market of the 80s, they appear to be doing to the stock market. It seems again to be a case of demographics. Another thing this gorup has in common beyond their enormous economic clout, is the fact they have never experienced a depression or a major world war. They are more entrepreneurial and not affraid to take risks or at least more willing to take risks than their parents. A new phrase has been gained "Boomernomics".

Twenty-five years ago, Canadian and American baby boomers born in the late 1940s and early 1950s found jobs and bought cars. They married and had children. They then bought houses and furniture. Competing against each other, they pushed up the prices of cars, furniture and other goods. They helped create double digit interest rates. When they bought houses in large numbers, they helped create a massive bull market in real estate which lasted until the late 1980s.

A bumper crop of grey hairs is now sprouting on those baby boomer heads. This development has enormous economic and political implications. The most important lesson for investors is that interest rates may even fall further but most likely will remain at relatively low levels for perhaps the next decade. They have already fallen lower than most people would have imagined. My article of last month, "Some of us can't afford to earn interest", pointed out this fact and that other investment classes have historically outperformed interest rates. Poor pity those who are stuck in low paying GICs or T-Bills.

With these low interest rates, other financial assets like equities can continue to rise from current levels, already considered lofty. I think that any spike in interest rates could mean the end (however short) of this current run up of the stock markets. After that, I can see an even longer and larger rise than we are now experiencing. I know, hard to believe.

In short, baby boomers now appear to be doing to financial asset prices exactly what they did to real estate prices in the 1970s and 1980s. As baby boomers age, they pass the point of buying houses and furniture. Housing prices have declined substantially and now appear to have levelled off, raising the question of real estate as a store of wealth. As these grey hairs enter their 50s and multiply, they begin to think seriously about retirement and the need to have some sort of financial nest egg. The stock market is providing the vehicle for them to acquire this nest egg.

Competing against each other, they then drive stock and bond prices to stratospheric levels. I commented to one of my colleagues the other day and said "I'm going to the doctor tomorrow to get an oxygen mask. Where are we headed in the next year? The share of older workers is projected to grow sharply by the end of the decade, bringing it back to levels last seen in the late 50s and early 60s. If the decade-ending work-force share is correct, it suggests that baby boomers are only mid-way through the process of running up financial asset prices, just as they did earlier to real estate prices.

Personally, I am still approximately 70% invested. I recently took some profits and went another 10% cash into my Money Market T-Bill account which is currently paying around 3.5%. You and I cannot afford to sit on the sidelines and watch it happen. We must participate.

But how? As I mentioned last year in my article, "The Crash of 1987," dollar-cost-average or selectively buy while retaining sufficient cash to buy more when this current phase of the bull market corrects. If people took my advice last year to do this they would have realized some handsome returns while not taking excessive risks. If you don't have the above mentioned articles, please call me for copies.

If you have any questions, please call Reg Borrow at (519) 855-6639. He is an Independent Financial Consultant with Regal Capital Planners Ltd.

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Created: Mon Sep 23 10:30:50 1996
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