Would a Baby Boomer sell-off hurt stocks?

July 2004 — Q: All the personal financial books state that "supply and demand" drive the market.  So what happens when the first Baby Boomers start selling their stocks to fund their early retirement?  What is your spin on what happens in 2010 and the following 30 years when there will be exponentially more sellers than buyers? — Lance R., Houston, Texas

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A: This might be a problem if Baby Boomers held most of U.S. stocks. But it turns out that Baby Boomers' direct holdings in U.S. equities are a fairly small chunk of all shares outstanding.

As of 2002, about 50 percent of all equities were held by institutional investors, including mutual funds, pension funds, insurance companies and other financial institutions. These funds have a very long time horizon. Even if they're paying out pension benefits to Boomers, those payments are based on long-term projections of investment returns. So it's not likely those portfolios will be dumping stock just because Boomers are retiring.

True, some of those funds represent investments, like stock mutual funds, held indirectly by individuals. A 1998 New York Stock Exchange study found that about 11 percent of all stocks were owned by individuals (many of them Boomers) through mutual funds.

But Boomers aren't the only ones holding stocks. That 1998 study found that 22 percent of shareholders are under 35 and 13 percent were over 65.

Lastly, when Boomers retire they probably won't dump their stock holdings all at once. Most retirement planners recommend that retirees hold some of their savings in stocks to generate higher returns.

But even if Boomers did flee stocks en masse, there are still plenty of foreign investors or younger Americans out there ready to buy. The bigger question is whether those younger investors will have the cash to buy stock. That will depend heavily on whether the economy is still creating enough well-paid jobs to allow future retirees to load up their 401(k) plans with all those stocks the Boomers want to sell.