Demographics, Asset Allocation and Bond Bubbles

by royalarse13

I was having cocktails with a bunch of financial planners and investment advisors recently and the oldest-of-old money management axioms was readily bandied about:

“Asset allocation should be determined by ones age: match your weighting in bonds/cash to your Age, make up the difference in stocks.”

While this old saw has many interpretations that will be exploited by great planners, the broader implications are clear: as boomers age their Marvin Milktoast advisors will continue to pound the table on the merits of investing in fixed income in ample proportions.  Your 70yo clients will invest $700,000 of their $1MM in bonds/cash and sprinkle the remaining $300000 around in the equity markets.  Foolproof right?

The detractors will caution of a bond bubble given the uber-low rates and distress in European sovereign credits.  Others worry bond yields pushing on the lower-bound thanks to ZIRP and #lowforlong themes have distorted the whole space causing them to avoid the space. 

But how much of this is rhetoric, what does the data tell us? 

Quite possibly my chart of the month: Nations with Younger Po... on Twitpic

For an answer see the commentary from Jerry Khachoyan ( @armotrader here: ).  The post is accompanied with many helpful graphics that illustrate the reality: bond prices can and likely will stay elevated for some time as slow economic growth fueled by deleveraging and demographic headwinds will temper the appetite for equities. 

Unless the wealthy, aging and mostly ignorant developed world start to disobey their financial advisors advice, we’re all turning Japanese.