Stock image of an elderly couple. REUTERS

By Chris Taylor

NEW YORK | Fri Jan. 13, 2012 10:26am EST

(Reuters) - If you're an investor in the stock market, you should cower in fear of Barry Uhl.

Not that he's a mean or imposing guy. The 59-year-old is perfectly pleasant and soft-spoken, a branch manager for discount brokerage Scottrade in Fremont, California, who daydreams about volunteering with animals for the Humane Society.

Instead, fear Uhl for what he represents. He's a baby boomer, and he's retiring in February. That means he's about to start drawing down his savings after building up a nest egg for so many years.

Uhl by himself isn't going to alter the course of the stock market, of course. But multiply his modest investment moves by roughly 79 million other members of his generation and you've got trouble. According to an Investment Company Institute report, a whopping 44 percent of all mutual-fund shareholders are boomers. As they take withdrawals from their retirement kitties over the next couple of decades, you're looking at a major, potentially market-altering event.

The first boomers have already turned 65, and every day for the next couple of decades another 10,000 people will do the same, according to data from the Pew Research Center. By 2030, 18 percent of America will be 65 or older, taking the Early Bird dinner special and slowly siphoning off their savings.

The front end of the baby boomer generation is starting to take money out, and that could become a big headwind for the stock market, says David Foot, a professor at the University of Toronto and author of Boom, Bust & Echo, which looks at how demographic trends affect the investing world. In the short-term, the economy drives market returns. But over the long-term, demographics dominates as the major determinant -- and its impact is very hard to offset.

Take Japan and its lengthy economic stagnation, which Foot attributes not to governmental incompetence or policy miscues but to the simple fact of that nation's demographics. While younger societies generally experience robust growth as its members enter the prime of their working and investing lives, aging societies grapple with an economic decline that's very tricky to evade.

For example, almost a quarter of Japan's population is now over 65 -- a number projected to rise to 40 percent by 2050.

The full force of these investing winds has yet to be felt in the U.S., since the leading members of the boomer generation are still in their mid-60s; minimum 401(k) withdrawals don't kick in until after 70. Indeed many boomers are still working and accumulating wealth, and the biggest demographic bulge of all is comprised of Americans in their late 50s, still in their prime earning years.

But demographic trends are already affecting the markets in significant ways. The hearty appetite for bonds and dividend-paying stocks reflects that boomers have begun to tweak their portfolios in the direction of income-oriented investments, to help preserve their capital and skirt market volatility. Scottrade's Uhl, for instance, has been subtly remaking his portfolio over the last five years; he's now about 50 percent in bonds and cash.

For six decades the boomers have driven everything in society, and that's only going to continue, says David Rosenberg, chief economist and strategist for wealth managers Gluskin Sheff. They can no longer afford to buy stocks for the long run and wait out any bust. They're focusing less on capital appreciation and more on income, and we're seeing that trend take hold already.

You needn't be worried about demographics causing a total U.S. market freefall, though. That's because many of those boomers had kids of their own, a sizable bloc (though not quite as massive) known as the 'Echo Boomers' or Generations Y. So even if there's a gradual exodus of boomers from the stock market, the full effect will be tamped down as their kids continue to work and invest. Says Foot: When boomers start to sell their stock, a large generation of their children will be coming into their 40s ready to buy them, which should help underpin the stock market in North America.

That said, there are certain steps you can take to deal with the demographic tsunami that may be on its way. A three-pronged plan:

- Avoid Japan and Europe, look to 'younger' populations. The demographic challenges facing those regions are significant and not going away, notes Foot. But not all countries have similar profiles: Brazil, Turkey, and Vietnam are three nations with relatively young populations whose economies will likely be revving up in years to come.

- Sectors matter. Speculators would be wise to match their stock picks to nations' demographic profiles. In young societies like India, where there are a lot of mouths to feed, agriculture is extremely important, says Foot. As those people age -- as is happening in Turkey -- they buy manufactured goods, housing, autos. Then as people move into their 50s and 60s, as is going on in North America, areas like pharmaceuticals become much better investments.

- Income is king. For Gluskin Sheff's clients, Rosenberg has been seeking out income at a reasonable price. That means slotting the majority of client assets in a combination of high-quality, income-producing equities and corporate bonds. You have to look at the market environment and demographics together, says Rosenberg. And that augurs well for investment strategies dedicated to income.


The author is a Reuters contributor. The opinions expressed are his own.

(Editing by Jilian Mincer and Beth Pinsker Gladstone)