Demographics are Critical to Success in Long-term Investing
Prepared for Robert R. Tweed

Want to potentially increase your success as an investor? Know your demographics.

When it comes to investing for the long run, i.e. anywhere from five years and on, one of the most important fundamental measures for investors to look at are demographics. Demographics outrank earnings, cash flow, debt ratios profitability margins, product cycles, and other indicators of company health any time you are looking at making a long-term investment.

Demographics address the questions “Is there a market for a product or service?” and “Will that market still exist or have grown five years from now?” Long term it doesn’t matter how healthy an investment is today if demographics don’t support its continued success.

Demographics in a nutshell is the study of people’s lifestyles, habits, population movements, spending, age, social grade, employment, etc., broken down by geographic location. The inclusion of location is essential because demographics are not generic. For example, from 2010 to 2030, the population age 65 and over is expected to grow by 75% to 69 million according to the U.S. Dept. of Health and Human Services . To date, the bulk of that growth has been in the South and West, where populations of individuals over age 65 are also the greatest.

If we assume you wanted to invest in senior assisted living facilities, those demographics could well be critical to the success of the project. Do you want to invest in an area with an anticipated 5% growth rate in your target market or a 20% growth rate?

There’s nothing new about demographic investing. Builders, mall developers, medical facilities, hotels and other industries have long relied on demographics as crucial fundamental data for new development or even when considering whether to hold on to an existing property. The difference is that individual investors are now looking at similar information during their decision making process. And, that information is much more accessible given the vast collection of public data now available on the internet.

When it comes to using demographics in investing, individuals can take a number of approaches:

• Identify what goods and services the largest population groups are most likely to consume over time. What are the essential needs of these groups?
• Look for areas of growth that will emerge as a population changes.
• Specific to a geographic region, determine how the demographics of the area changing and what this might mean in terms of the growth in demand for certain products and services.

The next step is to identify investment opportunities related to the demographic trends, keeping in mind that these opportunities will vary based on geographic region. Demographic investing can take the form of launching your own company to serve a demographic need, purchasing stock in companies related to areas of demographic growth, or purchasing buildings in which these companies operate.

One of the predominant uses of demographics is in real estate investing. For many individuals approaching retirement age, investing in real estate is attractive because it allows them to participate in demographic-driven appreciation in real estate without the personal commitment of their own business. Real-estate based investments can also deliver steady income to investors and tend to be non-correlated with the equity markets, helping to diversify stock heavy portfolios.

The cautions to this approach are that real estate investments incur various risks, including but not limited to: limited transferability, and variation in occupancy which may negatively impact cash flow, and even cause a loss of principal. Cash flow and appreciation are not guaranteed. Real estate values may fluctuate based on economic and environmental factors and are generally illiquid.

Real Estate Investment Trusts (REITs) have become a widely used tool for investing in real estate market. Because a typical REIT includes several different properties, investors are able to diversify their real estate holdings without the need to invest millions in multiple properties. Diversification does not eliminate risk or guarantee a profit, but rather is a strategy utilized to help manage risk. Many REITs invest in specific geographic areas or property uses – such as medical facilities – allowing investors to target specific areas of interest. Traded REITS are bought and sold similar to exchange traded equities on the national stock exchanges. Non-traded REITs are not publicly traded on a stock exchange, resulting in less liquidity, and generally involve a higher degree of risk, but have demonstrated low pricing volatility .

Because REITs are not taxed at the corporate level, the tax advantages of owning real estate are often passed along to REIT investors. This can enable investors to reduce their taxes through property depreciation benefits. As with all investments, past performance is not a guarantee of future results.

Demographic investing is one way to evaluate investment choices and target areas with the greatest growth potential going forward. But like all investment approaches there is always the possibility of loss as well as gain.

Tweed Financial Services, Inc. is a registered rep with CapWest Securities Inc. Securities and Investment Advisory services offered through CapWest Securities Inc, Member FINRA, SIPC, MSRB. Tweed Financial Services and CapWest Securities Inc are non-affiliated companies.