In July 2006, the GAO issued a seventy page report on the Baby Boom Generation, with the headline conclusion, “Retirement of Baby Boomers Is Unlikely To Precipitate Dramatic Declines in Market Returns, But Broader Risks Threaten Market Security“.

	The GAO Enters The Fray

A careful reading of this report shows that the conclusions were based on the following studies and observations by the Government Accountability Office:

1. Many people on Wall Street who were interviewed said that there was nothing to worry about.

2. Two-thirds of Baby Boomer assets are held by 10% of the population who the study concluded are so rich that they won’t need to sell stocks when they retire.

3. One-third of Baby Boomers don’t have any stocks at all, so they won’t be able to influence the market by selling.

4. Many economists performed regression analyses on past market data, while others developed simulation models of how they expected the market to operate over the next generation, and none of these experts could seem to find any provable relationship between the impending retirement of the Baby Boomers and stock market returns — with half of their results correlating to ‘unknown factors’.

5. The Baby Boomers will retire gradually over a generation, so the impact of their retirement on the market will never be sudden.

6. If the Baby Boomers think they are running out of money, they will just postpone retirement, get a job, or spend less, rather than sell stocks.

Thus the government has entered to fray about the Baby Boom Bomb, already noted in a previous article covering the debate between Professor Jeremy Siegel and Michael Milkin.

The GAO’s conclusion seems to be: Don’t Worry, Be Happy (Maybe).

Flaws in the Government’s Argument

Perhaps the greatest error in the GAO study is the underlying assumption that without a massive sell-off by Baby Boomers, there can be no ‘melt-down’ in equity prices.

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Wall Street ballyhoo and flim-flam to the contrary, the year 2005 closed-out half a decade of misery and pain for the average investor in US equities according to Federal Reserve flow of funds accounts F102 and L102.

	Investors Forsaken by the SEC

During these years, the SEC, the investors’ watchdog, had forsaken investors and averted its gaze from the diversion of shareholder wealth through buyback-option schemes, while appearing to protect shareholders’ interest with the show trial of Martha Stewart, for a matter unrelated to ordinary investors’ well-being.

With January 2000 as a starting point, the Federal Reserve flow of funds accounts show that stock investors were down $4.3 trillion in portfolio value and dividend payouts in 2005 were only running at about the same level as in 2000, five years earlier.

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Mutual funds are sold primarily on the basis of ‘performance’ measured by historical ‘total return’.

The famous Morningstar rating system is based on ‘total return’, in this case ‘risk-adjusted total return’ relative to funds of the same asset category.

The average American mutual fund investor is accumulating resources for retirement, say 20 or 30 years hence. The typical owner of mutual funds is unsophisticated and does not delve deeply into the significance of Morningstar ratings or total return figures.

The SEC allows promoters of mutual funds to trumpet historical ‘total returns’ as long as there is a disclaimer that “past performance is not necessarily indicative of future performance”.

A question worth considering is this: “Are investors being mislead by statistics on total return?”

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