Investing Beyond ‘Boomer Candy’

July 12, 2024 – The stock market has continued to climb higher this year after a strong year in 2023. Many are asking how much longer the market will continue to climb. No one truly knows the answer to that question, but it remains on investors’ minds. Those nearing or already in retirement, understandably, do not welcome the prospect of giving back part of their market gains.

With baby boomers controlling the vast majority of investment wealth in the U.S., investment product manufacturers have taken note of the sizable demand for market participation with downside protection. Eric Balchunas of Bloomberg coined the term “Boomer Candy” to describe products designed to be hard for baby boomers to resist. “Boomer Candy” targets those who enjoyed and benefited from owning stocks, but now do not want the full risk of periodic declines associated with stock ownership. These products allow an investor to own stock-based investments and, at the same time, offer varying levels of downside protection.

Generally, we do not encourage our clients to partake in “Boomer Candy” and believe there are smarter investment strategies. For years, these products were packaged in the form of structured notes: contracts with product providers that could be tailored to protect from losses while participating in some upside performance. These proved to be expensive to own and difficult—or impossible—to exit when needed. Structured notes were followed by a more investor-friendly approach: mutual funds that sell call options on an underlying portfolio of stocks. Selling these options generates a rich income stream paid to investors. This income also serves as a cushion to price declines of the stock portfolio, making the total return less volatile. In exchange, the options limit the upside performance of the portfolio. The most recent packaging for these products is Defined Outcome exchange-traded funds (ETFs). These ETFs have characteristics similar to the old, structured note contracts, but they include a more cost-efficient wrapper and the benefit of trading on an exchange, providing an exit if needed.

In contrast to the “Boomer Candy” products, we prefer to start by identifying what downside protection is truly needed. We propose a very candid assessment of the amount of household investments that are likely to be used during an investor’s lifetime. This can be a wide range of estimates given the potential for large, unexpected expenses such as healthcare costs and ever-longer life expectancy. Still, for many, a substantial percentage of household investment assets will not be utilized during their lifetimes. These assets may already be set aside in trusts for future generations or may be passed on by way of estates. In our view, those assets should have a separate risk and return profile. Making this distinction and taking a long-term perspective allows us to take advantage, if appropriate, of continuing with somewhat higher risk and return characteristics. The result is the potential for multiple decades of superior investment returns with manageable risk. For example, a $100,000 investment over a twenty-year holding period with a conservative 5% rate of return grows to $265,000. If the same $100,000 is identified as an asset to be passed to future generations and invested at a slightly higher 7% rate of return, it grows to $387,000—a $120,000 difference without significant consequence for the increased volatility.

Having identified the amount of assets that actually need downside protection, rather than “Boomer Candy,” we recommend the most straight forward, cost and tax efficient way to implement a portfolio to accomplish that protection. We prefer an appropriate mix of: (1) individual stocks or stock ETF’s, (2) fixed income in the form bonds or CD’s, and (3) very short-term, near cash, holdings such as money market funds or bonds with maturities of less than12 months. This approach can provide the investment returns, cash flow, and downside protection expected from portfolios with the mandate of providing liquidity for use during our lifetimes.

U.S. Stocks

Large company U.S. stocks once again led all other major asset classes in the recent quarter. The index performance has been concentrated in a handful of mega-cap technology companies around the theme of artificial intelligence, while the average stock in the index has posted modest gains. We continue to see opportunity in large U.S. stocks in the S&P 500 with returns for the average stock narrowing the performance gap relative to the large tech names. We favor quality earners and dividend payers to complement the big tech names.

Foreign Stocks

Japan has benefited from a weaker Yen and a welcome return of higher inflation. The Bank of Japan is likely to raise rates again amidst economic growth, higher inflation, and higher disposable incomes. We also see continued opportunity in European markets with the elections behind them, economies growing, and the Euro expected to strengthen compared to the Dollar. We also expect emerging market countries outside of China to benefit from global growth and the possibility of a weaker Dollar on expected Fed rate cuts.

Fixed income

With rate cuts expected by September, we are reviewing cash and money market positions account by account to consider shifting some of those dollars to longer maturity bonds to take advantage of the current higher rates by locking in those yields now. We continue to favor bonds with higher credit quality. To reduce interest rate bets, we “ladder” portfolios of individual bonds with similar dollar amounts in each maturity from two years to seven years.

We use tax-exempt municipal bonds when appropriate in taxable accounts. In retirement accounts and other tax-free or tax-deferred accounts, we invest in taxable fixed income securities including CDs, treasuries, government agency bonds, and corporate bonds. For a short-term objective, we may hold money market funds for daily liquidity with yields remaining above 5%. These cash or near-cash investments do have reinvestment risk if rates decline as most expect over the coming months.

While we discuss many areas of the market, our focus is on your individual goal and a personalized strategy to reach that goal. Your questions are always welcome. Please call or stop by the office any time.