Demographics and equity returns: A far-fetched horror story

March 9, 2018

Joe Davis

Joe Davis
Global Chief Economist

During a recent Financial Advisor Services webcast, a question was submitted that I wanted to be sure we addressed. Ernest, from Connecticut, asked, "Will the baby boomers' reduced equity exposure be offset by the millennials' equity investing?" Let's take a look.

If you wanted to write a stock market horror story, the plot might look something like this: As baby boomers retire, they will begin selling stocks. The millennial generation, burdened by student loans and traumatized by the dot-com bubble and global financial crisis, will avoid investing in stocks. The result: "Stockmageddon"!

Boomers' market footprint is not a systemic risk

Now that the percentage of the U.S. population aged 65 and older has reached an all-time high of 15% and continues growing, this potential scenario has garnered quite a following. When Vanguard looks at the plot, however, holes begin to emerge. Here are a few:

  • According to a 2006 analysis of Standard & Poor's 500 Index returns from 1948 through 2004 conducted by the U.S. Government Accountability Office, demographic variables accounted for less than 6% of stock market return variability. This finding indicates that macroeconomic and financial variables far outweigh the impact of demographics.
  • The baby boomer generation spans almost 20 years; therefore, any asset rotation out of equities will be gradual.*
  • According to the Federal Reserve Board's Survey of Consumer Finances, the 45- to 64-year-old age group owned 50% of all U.S. equities in 2016. This was almost identical to the 51% average held by the same cohort over the previous 27 years. During that time, the number of 45- to 64-year-olds increased from 19% to 26% of the overall population. In other words, even as the proportion of pre-retirees increased, their stock market footprint did not.
  • Foreign holdings of U.S. equities as a percentage of total U.S. equity market capitalization rose from 7.2% in 1988 to 22.6% by 2016. Even if there were a connection between U.S. demographics and domestic stock market returns, international investors would dampen the impact.**

No significant relationship exists between the changing proportion of U.S. retirees and long-term stock market return variability

No significant relationship exists between the changing proportion of U.S. retirees and long-term stock market return variability

Notes: The U.S. total stock market is represented by a spliced benchmark composed of the following indexes: Standard & Poor’s 90 Index (January 1926 through March 1957), S&P 500 Index (April 1957 through December 1974), Wilshire 5000 Index (January 1975 through April 2005), MSCI U.S. Broad Market Index (May 2005 through June 2013), and CRSP U.S. Total Market Index (thereafter). The historical data for the U.S. total resident population aged 65 and older (January 1926 through July 2017) were derived from Moody's Analytics database, available at

Source: Vanguard calculations, using data from U.S. Census Bureau and Moody's Analytics.

Don't believe everything you read about millennials

Chapter two of the story centers on the notion that, burdened with student loans and shell-shocked from the dot-com bubble and global financial crisis, the millennial generation is risk-averse and reluctant to invest in the stock market. When Vanguard analyzes the data, however, this narrative arc appears a bit far-fetched.

  • The ratio of debt payments to family income for heads of households younger than age 35 gradually declined from 18% in 1989 to 14% in 2016. The drop resulted from a combination of lower overall interest rates and the shift in debt composition from consumer credit to education. This undermines the theory that millennials' student loan obligations will constrict investable funds.†
  • The invention and widespread adoption of automatic 401(k) enrollment has increased participation rates in all age groups. Participation in the 25-to-34 age group rose from 57% in 2005 to 74% in 2015.‡
  • The remarkable popularity of target-date funds has improved investors' asset allocation strategies. In 2005, the 25-to-34 age group held 78% of 401(k) assets in equities. By 2016, that figure was 86%. This is a noticeable progression toward the 90% equity allocation that most target-date funds recommend for younger investors, and it contradicts the notion that millennials are too risk-averse.‡
  • The percentage of heads of households younger than age 35 holding stocks outside of a retirement account was 10% in 2016, slightly below the 11.7% average since 1987. This decline is more than offset by the growth in the cohort's retirement assets.†

A dubious tale

The scariest stories are those that are simple and believable. The plotline of an aging population causing a sell-off in equities meets these criteria but collapses under empirical analysis. The demographic changes occurring in the United States will have noticeable implications for labor markets, public finance, and political developments. However, Vanguard finds no credible evidence that demographic changes alone will negatively affect future stock returns.

*Vanguard calculations, using data from the U.S. Census Bureau.

**Vanguard calculations, using data from the World Bank and the U.S. Bureau of Economic Analysis.

†Vanguard calculations, using data from the Survey of Consumer Finances (Federal Reserve Board, 2017).

How America Saves (Vanguard, 2017).


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Joe Davis

Joseph Davis, Ph.D., a Vanguard principal, is the global chief economist and global head of Vanguard Investment Strategy Group, whose research and client-facing team develops asset allocation strategies and conducts research on the capital markets, the global economy, portfolio construction, and related investment topics. Mr. Davis also chairs the firm's Strategic Asset Allocation Committee for multi-asset-class investment solutions. As Vanguard's chief economist, Mr. Davis is a member of the senior portfolio management team for Vanguard Fixed Income Group. He is a frequent keynote speaker, has published white papers in leading academic and practitioner journals, and helped develop Vanguard Capital Markets Model® and the firm's annual economic and capital markets outlook. Mr. Davis earned his B.A. summa cum laude from Saint Joseph's University and his M.A. and Ph.D. in economics at Duke University.


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