The Big "To Whom"

A few years ago, a wise investment advisor taught me the “to whom” concept in investing. I was telling him about a stock I owned, and after listening patiently he said, “But who are you going to ‘to whom’ it to?” Call it a kinder and gentler twist on the greater-fool theory—there will always be a greater fool willing to buy your stock regardless of the value. When you are considering purchasing securities, ask yourself to whom you will sell them.

This is one of the biggest questions facing investors in the coming years: Who will buy the tremendous financial assets that the 74 million or so baby boomers have accumulated? 

Pessimistic prognosticators such as Peter Peterson, author of Running on Empty: How the Democratic and Republican Parties are Bankrupting Our Future and What Americans Can Do About It, and Lawrence Kotlikoff and Scott Burns, authors of The Coming Generational Storm: What You Need to Know About America’s Economic Future, are predicting a massive collapse in asset values as baby boomers rush to sell their stocks, bonds, and real estate to . . . well . . . nobody. The fact is that the generations coming up behind the baby boomers are small and they won’t have the buying power to absorb all of the baby boomers’ assets.

But Jeremy Siegel has a different view. Siegel is the Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, and was in Minnesota last fall to speak to investors. Siegel is the author of Stocks for the Long Run—named one of the 10 best investment books of all time by The Washington Post. His newest book is titled The Future for Investors. He has won widespread recognition for his research on the long-term—make that very long-term—returns for various asset classes, and it was this research that led him to his current views on the big baby-boom asset transfer issue.

First, his basic thesis: Of all the assets available to investors, stocks—and only stocks—have provided the most consistent, inflation-adjusted return (assuming dividends are reinvested) over the long run.

Siegel studied the inflation-adjusted returns of stocks dating back to 1871, and over that entire period he found that stocks—with dividends reinvested—year in, year out, decade in, decade out, have returned 6.8 percent for the entire period. And what about bonds?