What's next for boomers:
In the years ahead, five key trends will dominate your financial life. So far you've been lucky, baby boomer. Now it's time to be smart.
2. The fastest growth (and biggest gains) will come from abroad
The past 25 years: Flash back to the early 1980s. As bad as the economy was then, Americans could fall back on one comforting thought: We were still the world's sole economic superpower. Sure, later in the decade many feared Japan might overtake us. But we were still the world's largest exporter back then, and we accounted for a third of total global economic output.
Apart from bragging rights, this had a real impact on average American families. For starters, being the epicenter of the global economy meant foreign nations had to trade with us, which drove up demand for U.S. dollars. That, in turn, increased the purchasing power of the greenback and made foreign goods - from Toyotas to light Arabian crude - cheaper on our shores.
And since demand for dollars tends to express itself as an appetite for U.S. Treasuries, we learned we could issue Treasury bonds by the super-tankerful to cover the federal budget deficit - and interest rates would still go down.
What's next: While the U.S. remains an economic heavyweight, it will cease to bestride the globe alone. We already lost to China and Germany the title of world's biggest exporter of goods. And Uncle Sam's share of global economic output is expected to be cut nearly in half over the next quarter-century, to around 17%, as the emerging economies of China, India and Latin America mature.
"In 50 years the U.S. will be to China what Canada now is to the U.S.," predicts Boston University economist Laurence Kotlikoff. That may be an exaggeration. But there is a risk. If the U.S. dollar loses super-currency status, you'll see a jump in the price of foreign-made goods. U.S. interest rates may have to rise as well to keep foreigners buying our Treasuries.
On the other hand, what's happened isn't so much that we've gotten poorer - we haven't - but that the rest of the world has grown richer. And that's good. For starters, it translates into greater opportunity if you're willing to invest abroad. Also: When you start retiring and look for someone to sell your stockholdings to, says University of Pennsylvania finance professor Jeremy Siegel, you'll be glad for all the rich foreigners out there.
Do it now
Invest globally. As the U.S. ceases to be the only superpower, you have to stop thinking of yourself as an American-only investor. And put aside the dated notion that you can get all the foreign exposure you need simply by buying shares of U.S. companies with big international operations like Coca-Cola. Chances are you need to invest more (through mutual funds or ETFs) directly in foreign companies.
The average 401(k) investor, for example, has only 19% of his or her equity portfolio in foreign funds. Siegel thinks that figure should be closer to 40%. "We have to realize that our opportunities lie abroad in the dramatic growth of economies such as China and India," he says.
Since foreign stocks have been on a tear in recent years, this may not be the best time to leap in with both feet. Instead, ease into overseas funds gradually by investing a fixed amount at regular intervals, a technique known as dollar-cost averaging. This guarantees that you'll buy more shares when they're cheaper and fewer when they're pricey.
A new core holding. In the era of American dominance, the best fund to dollar-cost average into was the Vanguard 500 (VFINX), which tracks U.S. blue chips. But in this new era, you may need two core funds: the Vanguard 500 for U.S. stocks and Fidelity Spartan International (FSIIX) or Vanguard Total International Stock (VGTSX) for foreign exposure. Both international portfolios are in the Money 70.