By John Wasik
CHICAGO, Sept 30 One of the most difficult terms
to understand in long-term investing nowadays is "new normal."
Coined by PIMCO Chief Executive Mohamed El-Erian, it means
the "world of muted growth" that followed the 2008 meltdown. And
although stock returns have been strong this year, down the
road, the "new normal" will largely be driven by demographic
And unless the current fight over the U.S. government's debt
limit forces a deep and prolonged market meltdown, now is the
time to focus on an investment strategy with a longer view.
A combination of rising wealth, lower fertility rates and a
smaller working-age population in developed countries will
depress economic growth. Fewer younger people in the workforce
and more older, retired people could translate into lower stock
So how do you adjust your expectations? Follow the
demographic trends. More than 10,000 "Baby Boomers" turn 65
every day and will continue to do so for the next 19 years, so
as an investor, you need to focus on what this population will
demand. Retired people require fewer consumer goods and that
means fewer homes, appliances and lower sales for many items.
The most forward-looking investments would be in healthcare,
insurance and technology. Older Americans will spend more on
everything from drugs to devices that make aging easier.
Insurance will play a role as the Boomers seek to protect lump
sums from their retirement plans.
Lately, healthcare hasn't been a bad wager because the
possible "tapering" of the U.S. Federal Reserve's stimulus
program, and Congressional spending battles, have made investors
After a respite following the post-2008 slowdown, healthcare
spending is expected to accelerate to a 6 percent annual rate
between 2016 and 2022 from 4 percent through the end of this
year, according to the Centers for Medicare and Medicaid
As a sector, healthcare has been beating the broad market
this year. The S&P North American Healthcare sector index is up
nearly 28 percent for the year through Sept. 27, compared with
about 20 percent for the S&P 500 Index.
If you're going to invest in healthcare long term, you need
a fund that holds pharmaceutical, medical device and health
The Vanguard Health Care ETF invests in an index of
these stocks, holding major companies such as Johnson & Johnson
, Gilead Sciences Inc and insurer UnitedHealth
Group Inc. The fund is up nearly 30 percent through
Sept. 27 and charges 0.14 percent annually for expenses.
Insurance companies should be part of your portfolio because
of their durability in most economic climates and focus on
comprehensive financial services, which include retirement
products and investments.
The SPDR S&P Insurance ETF, holds heavyweights such
as Aon Plc, the Allstate Corp and Prudential
Financial Inc. It's up 37 percent through Sept. 27 and
charges 0.35 percent annually.
The third leg of this demographic play is technology, which
should not be left out.
The Technology Select Sector SPDR holds a basket of tech
leaders such as Microsoft Corp, Google Inc and
Cisco Systems Inc. Of the three sectors that seem well
positioned for growth, this one is the most out of favor. The
SPDR fund is up almost 6 percent this year. It charges 0.18
percent for annual expenses.
TAKING THE LONG VIEW
The slowly evolving realities of the wave aging Boomers -
more retirees and fewer workers - will have profound impact on
the economy, according to new data by Research Affiliates, a
Newport Beach, California-based investment strategies and
research firm. Baby Boomers will be working longer, but will be
less productive. They will also enjoy "longevity bonuses."
"Our work on demography and GDP would point to 1 percent
real GDP growth as a reasonable expectation for the coming 20
years," Rob Arnott, CEO of Research Affiliates told me in an
email. "While this sounds terrible, keep in mind that the growth
over the last 40 years has been only 2 percent."
Meager growth need not be perceived as catastrophic.
"With an aging workforce, and the slower productivity growth
of older workers, another small haircut is in order," Arnott
said. "It's actually okay. Slow growth is still growth."
Keep in mind that long-term forecasts are not always
accurate and are often derailed by financial crises. But
demographic changes in the United States and abroad are near
certainties based on current trends. You can almost bank on
these shifts transforming developed economies. Yet there's still
plenty of time to reorient your portfolio.