Demographics and market implications Adam Schickling, CFA Senior Economist Vanguard Investment Strategy Group December 2023
Trend #1: Slowing population growth Population size is a fundamental determinant of economic size, so in the coming decades population growth will shift from an economic tailwind to an economic headwind This is a global phenomenon, but outlooks can widely vary among select countries
Source: Vanguard analysis, based on data from World Population Prospects: The 2017 Revision.
2
Trend #2: Record high proportion of elderly Dependency ratios are set to rise globally, as the number of young and old persons grows relative to the number of working-age persons. Unlike the post-WWII era, higher dependency ratios will reflect record proportions of elderly throughout major regions.
Source: Vanguard analysis, based on data from World Population Prospects: The 2017 Revision.
3
Economic realities are more nuanced than assumptions
Source: Vanguard analysis
4
Demographics influence asset returns via two channels Changes in aggregate economic growth and investors’ savings and investment preferences are the two drivers of fixed income and equity returns Current demographic trends suggest lower aggregate economic growth in the decades ahead
5
The proportion of net savers is decreasing Consumption remains steady into old age
Net savers will still outnumber drawdowns
120%
60% 50%
80%
Percentage of US Population
Percentage of Prime Age Income
100%
60%
40%
20%
0%
0
5
10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Age
G7 Median Consumption Labor Income
40%
Population Share 25-64
30%
Population Share 65 and older
20% 10% 0%
1940
1960
1980
2000
2020
2040
2060
G7 Median
Source: Vanguard analysis, based on data from World Population Prospects: The 2017 Revision.
6
An investor’s glide path is gradual
Source: Vanguard
7
Generational differences in investment risk tolerance Investors who opened accounts during periods of low returns tend to hold more conservative portfolios
Average portfolio allocation to asset class as of December 31, 2022
66%
Millenials
5%
70%
Generation X
6%
69%
Baby Boomers
29%
11%
60%
20%
25%
20%
19%
Median equity allocation as of December 31, 2022
Gen Z
90%
80%
50%
Black Monday 10/19/87
Peak 1990s bull mar k et
Recover y from GFC
58%
26%
25%
70%
0%
60%
-25%
2022 Bear market
Dotcom
-50%
16%
GFC <-- Longer tenured investors
Equity
Bonds
Cash
8…
72%
50%
Silent generation
Source: Vanguard 2023
86%
S&P 500 return
Younger investors tend to hold cash and ignore bonds
Year investors opened their first account at Vanguard Newer investors -->
S&P 500 Return (rhs)
8
Summary • Demographic changes, particularly those affecting the working-age population, are perhaps the most readilyavailable and predictable economic variables and therefore should be priced into financial asset values. • The “sustained liquidation” narrative fails to account for the prolonged nature of asset reallocation and retirement drawdowns, the concentration of equity ownership, and the non-linear relationship between investor cashflows and asset returns. • The causal link between asset returns and investor cashflows (performance-chasing) is well-documented. Two-way causality is illogical as it would result in an unsustainable feedback loop. • Initial experiences in financial markets can dictate generational differences in investment risk tolerance, potentially resulting in suboptimal asset allocations.
9