Demographics and Investing!

Five years ago, I was very fortunate to listen to Harry Dent, author of the best selling books “The Great Boom Ahead” and “The Roaring 2000s Investor”. His passion for demographics and investing was incredible and I thought I would share with you some of his insights.

His basic premise was that as far back as we could remember, economists have attempted to utilize interest rates, labour statistics, and other economic variables to try and predict the future of markets.

In Dent’s opinion, “they have the right analysis for the wrong questions!” Dent is passionate that the best way to predict the future is to understand people. He believes demographics account for 80% of what happens. It is people that drive the economy and not interest rates or economics.

Demographics vs economics

As far back as we can remember, economists have attempted to utilize interest rates, labour statistics, and other economic variables to try and predict the future of markets. As Dent puts it, “they have the right analysis for the wrong questions!”.

Dent is passionate that the best way to predict the future is to understand people. He believes demographics accounts for 80% of what happens. It is people that drive the economy and not interest rates or economics.

Dent’s view on averages

Dent believes averages are useless. For example, the average yearly temperature in Edmonton might be about 12 degrees Celsius. Based on this average information, you might wear a light jacket all year round. However, you would find yourself cold in the winter, hot in the summer, wet in the spring and just about right in the fall.

Dent argues that markets and economies have seasons just like the weather and those seasons can be predicated by studying people, their behavior and demographics.

Spending and savings in North America

Dent has made some very bold predictions for the future using his research on people and demographics. He concludes that people reach their peak spending habits all the way until age 46.5. It is at this point they not only have high spending habits but they also start a period of high savings. With the baby boomer generation reaching peak spending and savings rates, Dent believes you will continue to see strong economies and strong markets. According to Dent, he predicts that the boom will last until 2008 in Canada and 2009 in the US. At that time, bonds will come into favour over equities in North America and other countries like in ASIA will experience the next boom. Until then, he is passionate about equity investing for wealth creation.

Harley Davidson

In one example, Dent sites his research that people have the most discretionary income between the ages of 45 and 50. It is at this time people have finished paying off their mortgages and when their children begin to reach an age of independence.

Coincidentally it is also the most common age of mid-life crisis. Harley Davidson Motorcycles is one of the companies benefiting from this phenomenon as they can’t keep up with the demand as boomers enter their ‘mid-life crisis’ years. With all these middle age men riding Harley’s, Dent believes this company will continue to excel for at least 5 years.

Harry Dent and mutual funds

Listening to Dent or reading his books is like going to a motivation speech on investing. After listening to him, you can’t help but not feel good about equity investing in North America.

If you share Dent’s beliefs and passions, then you will be interested in a new fund called the AIM Dent Demographic Trends Class Fund offered through AIM Mutual Funds. Dent has some interesting research on allocation of assets and sectors. His visionary research will guide the underlying themes of the fund while AIM’s proven bottom up stock picking will select the securities.

While AIM has teamed up with a high profile person like Harry Dent, this fund is not the first of it’s kind. C.I. Boomernomics and Elliott and Page Generation Wave funds are two other examples of funds with an underlying demographic theme.

Spending and Savings in North America

At the time, Dent made some very bold predictions for the future using his research on people and demographics. He concluded that people reached their peak spending habits all the way until age 46.5. At that point they not only have high spending habits but they also start a period of high savings. With the baby boomer generation reaching peak spending and savings rates, Dent believes you will continue to see strong economies and strong markets. According to Dent, he predicts that the boom would last until 2008 in Canada and 2009 in the US. At that time, bonds will come into favour over equities in North America and other countries like Asia will experience the next boom. Five years ago, he was using demographics to tell the story that equity investing was the best form of wealth creation. After listening to him, you can’t help but not feel good about equity investing in North America.

The last five years . . .

Unfortunately for all of us, the last 5 years since then have been far from utopia for equity investors. In fact, investors endured one of the worst bear markets in history. Not only did investors struggle to simply stay afloat in the past five years but also 58% of all equity funds with a 5 year track record lost money.

Five years ago when I wrote the article, I made specific reference to three demographic based mutual funds: the AIM Dent Demographic Trends Class Fund offered through AIM Mutual Funds, the C.I. Boomernomics Fund and Elliott and Page Generation Wave Funds. Out of these three funds, five years later, only the CI Boomernomics fund still exists with a far from impressive result with a 5 year annualized return of -9.0%.

My two cents

I have a tremendous amount of admiration for Dent’s passion, his research and his very open and bold predictions but in the end, only time will tell whether he has the answers for the future.”

I went on to say, “I believe good research leads to good decisions and Dent comes well prepared. I wait patiently for 2008 to see if Dent is “the man”! Until then, I will continue to stick to good principles of diversification, planning, patience and good research!”

For me, we have not hit 2008 but in the last 5 years, the demographic story has certainly hit a low spot when it comes to investing. The moral of the story is to be cautious of stories. They always exist whether it is the next company with the next wonder product or the next sector that will make you rich (Gold) or the next country that is going to become the next world superpower (China). Stories form the current and future trends of investing. Despite all the stories and trends, my story remains the same. Stick with the principles of investing founded on research, planning, and diversification.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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