But here’s another economic headwind they face as they are coming of age: the percentage of the global population that is 65 or older will double from 10% to 20% by 2050. As millennials enter their peak earning years, there will be 1.6 billion elderly people on the planet.
Someone Has to Pay the Bill
Today’s infographic comes to us from Aperion Care, and it highlights how demographics are shifting as well as the economic challenges of a rapidly aging global population.
With an older population that works less, support and dependency ratios get out of whack. After all, countries already spend trillions of dollars each year on healthcare and social security. These systems were designed a long time ago, and were not setup to work with so few people paying into the programs.
Which Countries Face Headwinds?
While most countries face similar obstacles with aging populations, for some the problem is more severe. The Potential Support Ratio (PSR), a measure of amount of working people (15-64) for each person over 65+ in age, is anticipated to fall below 5.0 in countries like Japan, Italy, Germany, Canada, France, and the United Kingdom. These countries will all have significant portions of their populations (>30%) made up of elderly people by 2050. The United States sits in a slightly better situation with 27.9% of its population expected to hit 65 or higher by the same year – however, this is still analogous to modern-day Germany (which sits at 27.6%), a country that is already dealing with big demographic issues. Here’s one other look, from our previous Chart of the Week on dropping fertility rates and global aging:
Will millennials be able to diffuse the demographic timebomb, or will an aging population be the final straw?
on Last year, stock and bond returns tumbled after the Federal Reserve hiked interest rates at the fastest speed in 40 years. It was the first time in decades that both asset classes posted negative annual investment returns in tandem. Over four decades, this has happened 2.4% of the time across any 12-month rolling period. To look at how various stock and bond asset allocations have performed over history—and their broader correlations—the above graphic charts their best, worst, and average returns, using data from Vanguard.
How Has Asset Allocation Impacted Returns?
Based on data between 1926 and 2019, the table below looks at the spectrum of market returns of different asset allocations:
We can see that a portfolio made entirely of stocks returned 10.3% on average, the highest across all asset allocations. Of course, this came with wider return variance, hitting an annual low of -43% and a high of 54%.
A traditional 60/40 portfolio—which has lost its luster in recent years as low interest rates have led to lower bond returns—saw an average historical return of 8.8%. As interest rates have climbed in recent years, this may widen its appeal once again as bond returns may rise.
Meanwhile, a 100% bond portfolio averaged 5.3% in annual returns over the period. Bonds typically serve as a hedge against portfolio losses thanks to their typically negative historical correlation to stocks.
A Closer Look at Historical Correlations
To understand how 2022 was an outlier in terms of asset correlations we can look at the graphic below:
The last time stocks and bonds moved together in a negative direction was in 1969. At the time, inflation was accelerating and the Fed was hiking interest rates to cool rising costs. In fact, historically, when inflation surges, stocks and bonds have often moved in similar directions. Underscoring this divergence is real interest rate volatility. When real interest rates are a driving force in the market, as we have seen in the last year, it hurts both stock and bond returns. This is because higher interest rates can reduce the future cash flows of these investments. Adding another layer is the level of risk appetite among investors. When the economic outlook is uncertain and interest rate volatility is high, investors are more likely to take risk off their portfolios and demand higher returns for taking on higher risk. This can push down equity and bond prices. On the other hand, if the economic outlook is positive, investors may be willing to take on more risk, in turn potentially boosting equity prices.
Current Investment Returns in Context
Today, financial markets are seeing sharp swings as the ripple effects of higher interest rates are sinking in. For investors, historical data provides insight on long-term asset allocation trends. Over the last century, cycles of high interest rates have come and gone. Both equity and bond investment returns have been resilient for investors who stay the course.
