Investing in the Habits of Old and Young

— -- For decades, investors have been focused on companies that market intensively to the baby boom generation – people born in the nearly two decades after World War II. This kind of demographic investing, as it’s called, has become ingrained in the DNA of American markets. Just Google “baby boomer products and services” and you’ll find more than 1.3 million entries.

But while everyone has been fixating on the consumer whims of baby boomers, a larger demographic group has emerged and may well exceed the boomers’ influence. Millennials, generally defined as people born between 1981 and 1997, now number 75 million, according to Pew Research Center, compared with 74 million baby boomers.

Many areas of the economy – and the stock market – are driven by the spending of these two demographic consumer groups. These two groups potentially offer a fairly reliable investing strategy for individuals who are looking for the right companies at the right time at the right price.

These two generations are the big drivers of consumer spending, and will remain so for the next decade and beyond as millennials settle in to pay mortgages and save for their kids’ college educations and boomers move into their twilight years and assisted-living facilities. Here, then, are some pathways for investors in this two-pronged stock strategy.

Examples of companies that target millennials

Strong investment themes for this group include: retail brands such as Michael Kors, Nike, Under Armor, VF Brands (Wrangler, North Face, Timberland, Lee); retail outlets and enablers such as Amazon, PayPal, Yelp and Etsy; and, of course, social media and technology companies Facebook, LinkedIn, Yelp, Grubhub and Google.

For millennial dwellings, think in terms of both apartments (companies such as Equity Residential and Avalon Bay) and inexpensive single-family homes (Ryan Homes and Pulte Homes), spurring home improvement (Home Depot and Lowes).

Millennials like to have rewarding travel experiences, but unlike boomers, they don’t tend to care much about quality hotels or five-star lodging, so the focus here should be on tech tools for travel and entertainment, such as Expedia, Priceline, Tripadvisor and Live Nation Entertainment.

As millennials get older, they are marrying and having children, rechanneling their disposable income to products of companies such as Disney, Hasbro, The Children’s Place and Carters.

Millennials are more concerned with what’s in their foods than boomers were at the same age, and they tend to favor “natural” foods, focusing on locally-produced organic items. They like to shop at Whole Foods Market or Sprouts Farmers Market and eat at Zoe’s Kitchen. Many millennials got these inclinations from their parents, now boomers who themselves favor more healthful foods.

Thematic ETFs (Exchange Traded Funds) are available for investing in stock sectors marketing to millennials (for example, MILN).

Examples of companies that cater to boomers

Far more than millennials, boomers have money and invest it, so think Blackrock, Franklin/Templeton, Schwab, Fidelity and TD Ameritrade.

Their travel spending leans toward companies such as Carnival Cruise Lines, Royal Caribbean, Southwest Airlines and Starwood Hotels.

Unlike millennials, they spend more on health care, of course, so think Walgreens Boots, CVS, Medtronic (medical instruments), and pharma companies Novartis, Pfizer and Amgen. And there’s Johnson & Johnson, a behemoth with personal care products, surgical supplies, medical devices and pharmaceuticals. For those who want to invest broadly in healthcare properties, there’s a REIT (a real estate investment trust) called Senior Housing Trust, and for thematic investing in health and wellness companies, there’s LNGR (living longer), an ETF. Vanguard has a health care ETF: VHT.

Their housing preferences trend toward more upscale dwellings (Toll Brothers) or senior housing (Senior Housing Properties Trust).

Another thing boomers spend on is consumer staples, including personal care products for the aging. Think Procter & Gamble and Kimberly Clark, which makes Depends. Guggenheim offers an ETF for this sector: Equal Weight Consumer Staples (RHS).

Though millennials and boomers generally spend differently, there are some common areas for investment. Surveys have found that Apple is the most popular stock owned by both groups, and both also favor such names as General Electric, Intel, Exxon and Berkshire Hathaway.

Of course, how well investors do with this kind of demographic investing depends on which companies they buy or sell when and at what price, and how they manage this portion of their portfolios over time. To increase your chances of success, consider these points:

• Take advantage of weak market sectors that show promise because of pent-up demand. Housing stocks have faltered in recent years, but millennials will need somewhere to live when they get a better job and finally move out of their parents’ homes. So housing stocks stand to show good potential for growth.

• There’s also pent-up travel demand, as boomers hit retirement age. They suppressed their wanderlust during the recession and many still haven’t taken their bucket-list trips. (Millennials travel a lot, travel differently and don’t let much stop them. It’s not a luxury cruise for them – more like Air BNB and a smartphone travel app.)

• Don’t assume that just because you bought a stock, it will necessarily ascend indefinitely. Any sector or stock can be overbought, especially if too many investors adopt the same demographic strategy that you do. So make sure there’s value in what you’re buying, that the company’s fundamentals are sound and it’s not priced too high. So do your due diligence, and don’t buy into hype.

• It’s hard to see hype when it’s everywhere, as it tends to do in a bubble. Remember the tech bubble of the late 90s? Don’t get caught in a boomer bubble or a millennial bubble—or a sector with these investing areas that has a bubble of its own. Pay attention to when stocks are getting pricey because of investor behavior—not because of true growth potential.

And keep in mind the investing basics of asset allocation and portfolio diversification. When diving into demographic investing, spread your investments over various companies and sectors so you don’t get clobbered when one tanks.