As baby boomers age, they should increasingly seek safety and income in their investment strategies.
At least, they should if they want to avoid disappointing Wall Street, which is largely convinced that boomers will do the conservative thing and begin tilting their portfolios toward capital preservation and away from capital appreciation.
This suggests that bonds and other income-generating securities will be in much greater demand over the next few decades by the 79 million boomers, the first of whom are turning 60 this year.
The deal last week between brokerage Merrill Lynch & Co. and bond investment giant BlackRock Inc. was in part a bet on a rising appetite for bonds among individual investors. Merrill is taking a 49.8% stake in the firm and in so doing is opening a new sales frontier for BlackRock: the brokerage's millions of retail customers.
But if it's conventional bonds that Wall Street wants to sell the boomers, there are practical reasons that the pitch may have trouble impressing its intended audience.
One is that the interest rates paid on longer-term bonds still are near generational lows -- in the low single digits for U.S. Treasury securities. This makes them unappealing on their face to plenty of investors relative to taking a chance in the stock market or just keeping money in federally insured bank accounts.
A bigger issue may be that many people simply don't understand bonds or bond mutual funds. That a bond fund's share price can fall (in other words, you can lose principal value) if market interest rates rise isn't an easy concept to grasp. Besides, if you're supposed to be protecting your principal, who needs any risk of loss?
There is, however, one type of bond investment that seems to offer a happy middle ground:. so-called stable value funds, which provide the income return of bond funds with a guarantee (albeit, not a government guarantee) against principal loss.
Stable value funds are available only through 401(k) retirement-savings and company profit-sharing plans. More than half of such plans offer them, industry surveys show.
And where they're offered, they're a hit. The accounts held 16.9% of the average 401(k) participant's plan assets in 2004, according to an annual survey by consulting firm Hewitt Associates.
Just two investment options held more money: sponsoring companies' own stock, at 26.5% of average assets, and U.S. blue-chip shares, at 19.2%, Hewitt's data show.
