Author predicts less spending will hurt economy, stocks

If current stock market and economic volatility has you edgy now, just wait a few years. Decreasing consumer spending has the potential to create a long winter doldrum for the economy and stocks, according to a Littleton financial planner.

James Lunney, author of the new book “Surviving the Storm: Investment Strategies That Help You Maximize Profit and Control Risk During the Coming Economic Winter” (McGraw-Hill, $29.95), bases his forecast on future demographic trends. And those trends show the bulk of Americans, the baby boomers, are passing their peak spending years. Less shopping leads to fewer profits for companies because consumer spending represents 70 percent of the economy, Lunney said.

“Data show people tend to spend less as they age,” he said. “Boomers are already set. We will spend less, and we won’t spend it on things we historically spent on.”

He cites government statistics that find people spend most in their mid to late 40s, and that wave from the end of the baby boom is on the downside.

Though the economy won’t spiral into a depression, he said, it’s hard to predict just how much the lower spending will crimp company profits and their stock.

“Never has there been a period in history where you have a large generation followed by a smaller generation,” Lunney said. “Even foreign markets could be hurt, like China, because of fewer demand for goods.

“The market’s not going down because boomers are taking money out of stocks, it’s because of reduced spending.”

To protect portfolios, he advocates moving money into short-term bonds, especially foreign bonds, and money markets. With postboomer consumer spending starting to slow and weighing on corporate profits, by 2010 as much as 80 percent of a portfolio should be out of U.S. stocks, he writes, with the shifting of assets gradually beginning this year.

Lunney said that while his point in writing the book was not to scare investors, he’s still taking heat from his peers.

Investors who try to time the market’s moves are only increasing risk and decreasing return, said Allan Roth, a certified financial planner in Colorado Springs.

“When you move in and out of the market you are reducing diversification,” he said. “That timing causes us to way underperform the market. If we miss the ups but capture the downs, we have much more risk.”

Investors could face higher taxes if they sell profitable stocks, which then reduces returns.

Research by the University of Michigan found that from 1973 to 2002, investors who followed a buy-and-hold strategy outperformed those who traded more frequently by 5.3 percent.

Roth said the market doesn’t always follow the direction of the economy.

“If I could go back five years and know that we’d be bogged down in a war, oil would be at $100 a barrel, we’d have huge amounts of deficit spending and we’d be in a subprime lending crisis, I’d have sold every penny of stock I owned,” he said. “Doing this would have made me miss out on U.S. stocks nearly doubling and international stocks nearly tripling.”

Though the future is anyone’s guess, Lunney said his purpose is to make investors aware of demographic trends that may influence stock performance and to prevent investors from losing money.“If we are correct we protected ourselves and did no harm. And if we’re wrong all we did was make a little less than our neighbor,” he said

Contact the writer or send personal finance questions to: dan.serra@gazette.com or Dan Serra, Gazette Business Desk, 30 S. Prospect St., Colorado Springs 80903. Questions will be answered in part by local financial planners.