The Blob

Monday, April 03, 2006

Highly Recommended: The Future For Investors

Every so often, you read a book that blows you away. So it is with The Future For Investors by Jeremy Siegel. Professor Siegel is a distinguished economist from the Wharton School of Economics. The book simply blew away about 90 percent of the assumptions I had on the stock market. Instead of chasing down the next Google as an investment, Professor Siegel instead methodically gives evidence that overlooked, large companies that pay big dividends have in the past and will in the future create much better investment returns.

The second part of the book deals with the dramatic changes in demographics that will occur worldwide in the next 20 years, and how that will impact investors as well as people planning retirement. Quite simply, the baby boom generation will be retiring beginning within 10 years. That's the bulk of our population. And that means baby boomers will soon start cashing in their stocks, selling their homes, and tapping in on Social Security. A stock's or home's price is only as good as having a market for someone to buy what you're selling. And if there are fewer Gen-Xers or Gen-Y buyers for stocks and homes being sold, this will cause huge problems.

It's a bad enough problem here in the US. Europe and especially Japan is aging faster. In 20 years, over half the population of Germany will be retirement age. Japan even more so. This will cause tremendous problems for their societies. In the US, as the tax base shrinks, I can only conclude that government will shrink with it. That means fewer social programs and cuts in the defense budget. In the face of growing hostility from the Islamic world and a rapid arms build-up by China, North Korea and Iran, things get interesting.

Siegel sees the answer in the rapidly growing economies of China, India and other developing countries. Something that will blow the collective minds of Americans is the fact that within 20 years, the economies of China and India will sail past that off the US. It will be a shock to many in the United States, but in these growing markets, Siegel believes that we will find the buyers for our stocks and homes.

Saving Social Security will be another matter. We have come to anticipate that we will retire at 62 or 65. Siegel, and a growing number of economists worrying about this, feel that the one way to salvage the rapid drain on Social Security will be to have Americans work much longer, and postpone retirement for an additional 10 years. Other solutions being considered, including raising Social Security taxes, would have an inverse (negative) effect.

On many levels, I consider this to be one of the most profound books I have ever read. If you care about your future, this is a must-read.