COLUMN-Demographics will drive the "new normal" economy

By John Wasik

CHICAGO, Sept 30 (Reuters) - One of the most difficult terms to understand in long-term investing nowadays is "new normal."

Coined by PIMCO Chief Executive Mohamed El-Erian, it means the "world of muted growth" that followed the 2008 meltdown. And although stock returns have been strong this year, down the road, the "new normal" will largely be driven by demographic forces.

And unless the current fight over the U.S. government's debt limit forces a deep and prolonged market meltdown, now is the time to focus on an investment strategy with a longer view.

A combination of rising wealth, lower fertility rates and a smaller working-age population in developed countries will depress economic growth. Fewer younger people in the workforce and more older, retired people could translate into lower stock returns.

So how do you adjust your expectations? Follow the demographic trends. More than 10,000 "Baby Boomers" turn 65 every day and will continue to do so for the next 19 years, so as an investor, you need to focus on what this population will demand. Retired people require fewer consumer goods and that means fewer homes, appliances and lower sales for many items.

The most forward-looking investments would be in healthcare, insurance and technology. Older Americans will spend more on everything from drugs to devices that make aging easier. Insurance will play a role as the Boomers seek to protect lump sums from their retirement plans.

Lately, healthcare hasn't been a bad wager because the possible "tapering" of the U.S. Federal Reserve's stimulus program, and Congressional spending battles, have made investors more defensive.

After a respite following the post-2008 slowdown, healthcare spending is expected to accelerate to a 6 percent annual rate between 2016 and 2022 from 4 percent through the end of this year, according to the Centers for Medicare and Medicaid Services.

As a sector, healthcare has been beating the broad market this year. The S&P North American Healthcare sector index is up nearly 28 percent for the year through Sept. 27, compared with about 20 percent for the S&P 500 Index.

If you're going to invest in healthcare long term, you need a fund that holds pharmaceutical, medical device and health services companies.

The Vanguard Health Care ETF invests in an index of these stocks, holding major companies such as Johnson & Johnson (NYSE: JNJ - news) , Gilead Sciences Inc (NasdaqGS: GILD - news) and insurer UnitedHealth Group Inc. The fund is up nearly 30 percent through Sept. 27 and charges 0.14 percent annually for expenses.

Insurance companies should be part of your portfolio because of their durability in most economic climates and focus on comprehensive financial services, which include retirement products and investments.

The SPDR S&P Insurance ETF, holds heavyweights such as Aon Plc (NYSE: AON - news) , the Allstate Corp and Prudential (LSE: PRU.L - news) Financial Inc. It's up 37 percent through Sept. 27 and charges 0.35 percent annually.

The third leg of this demographic play is technology, which should not be left out.

The Technology Select Sector SPDR holds a basket of tech leaders such as Microsoft Corp, Google Inc (NasdaqGS: GOOG - news) and Cisco Systems Inc (NasdaqGS: CSCO - news) . Of the three sectors that seem well positioned for growth, this one is the most out of favor. The SPDR fund is up almost 6 percent this year. It charges 0.18 percent for annual expenses.

TAKING THE LONG VIEW

The slowly evolving realities of the wave aging Boomers - more retirees and fewer workers - will have profound impact on the economy, according to new data by Research Affiliates, a Newport Beach, California-based investment strategies and research firm. Baby Boomers will be working longer, but will be less productive. They will also enjoy "longevity bonuses."

"Our work on demography and GDP would point to 1 percent real GDP growth as a reasonable expectation for the coming 20 years," Rob Arnott, CEO of Research Affiliates told me in an email. "While this sounds terrible, keep in mind that the growth over the last 40 years has been only 2 percent."

Meager growth need not be perceived as catastrophic.

"With an aging workforce, and the slower productivity growth of older workers, another small haircut is in order," Arnott said. "It's actually okay. Slow growth is still growth."

Keep in mind that long-term forecasts are not always accurate and are often derailed by financial crises. But demographic changes in the United States and abroad are near certainties based on current trends. You can almost bank on these shifts transforming developed economies. Yet there's still plenty of time to reorient your portfolio.