Harry Dent popularized the Age Wave Theory which posits that the stock market would peak between 2007 and 2009 because of the age demographic of the baby boomer generation.   Perhaps it was coincidental that we had the housing credit mess coincide with baby boomer theory or perhaps they are related but the one question that I’ve been asking boomers is when they plan on cashing out.

Let me give you the scenario I’ve been giving the boomers:  You’re 55 years old today and you’ve managed to save 10% of your income  over the past 30 years of your working life and built a nest egg of $500,000.   This money was primarily in mutual funds that has taken a big hit lately and the Dow is starting to climb back up from the abysmal 6000 and you plan on cashing out.   The question:   When do you cash out?

Do you cash out at Dow 9000?  Dow 10000?  Dow 12000?

Although I’m 20+ years away from this scenario I’ve been considering it a great deal because there is no guarantee that we won’t hit a bad cycle in 20 years and there’s no guarantee that this market won’t be dead for another “lost decade” over the next 10 years.    I know the simply answer is to “re-balance” your portfolio but if the Dow stays flat for the next 10 years how much does re-balancing really do for you?   Worse yet, what if the market declines and you keep re-balancing into a worse and worse position?

I predict we’re going to have a large rally at some point and many people (e.g. boomers) are going to jump at the opportunity to cash out but the real question is at what point does this demographic cash out?