The Pig in the Python – Why I’m Long on Health Funds

I’ll admit it. I’m much more heavily invested in health care than you think I should be, and that’s alright – it’s perfectly within your right to be wrong.*

I’m so bullish, even my kids’ 529’s and Coverdells are heavily invested in health funds.

Why?

It’s all about the pig in the python. Think baby boomers, born 1946-1964.

Let’s look at some population pyramids.  Consider 1965 – see that wide base for the 0-20 year olds. Those are the boomers. Almost no one 90 and older.

Now jump ahead 15 years and look at that big bulge – the baby boomers are now 15-35, and have become the pig in the python.

In 2010, we can still see those boomers, now 45-65, are pushing into those upper ages (and a new pig, the millenials, have appeared)

In 2025, we can see that number of elderly americans will be much larger than it’s ever been – the pyramid is getting top heavy (The boomers are the 60-80 group). The pig isn’t as obvious since many are dying off, but compare the top of 2025 to the top of 1965:

So what does this all mean? Here are some more explicit numbers:

• 3 million more retirees per year for the next 15 years
• From 2011 (the first year baby boomers turned 65) to 2029 (the lastyear the baby boomers turn 65), the number of Americans 65 or older will have increased from 40+ million to 70+ million
• The fastest growing part of the population is, and will likely continue to be, 85+ year olds

And let’s ignore boomers for a moment. There are plenty of other reasons why medical costs are booming:

• Obeseity rates are exploding
• We subsidize foods (sugar, corn, etc.) that contribute to preventable diseases (diabetes, heart disease, etc.) which cost a boat load of money
• Our culture (include advertising, government, the cult of busy) doesn’t promote healthy eating or activity in general, . This ain’t changing any time soon. (But if you want to make a difference in the micro, consider how the French eat and teach their kids to eat. Check out Karen LeBillion’s books here: We’ve found them helpful in raising mindful eaters)

Now just consider just the Boomers again. Over the next twenty years, the boomers are going to more medical resources that any group of 65+ folks ever, because we are living longer and there are a crap ton of them.

Medical care is expensive.

Drugs are expensive.

More expensive nursing care will be needed.

(Are you going to take care of your parents in their dotage? Change their diapers? Yeah, I thought so)

More of everything that is expensive.

Look at all the CVS pharmacies popping up everywhere – and Drugstore X that inevitably shows up directly across the street.

They know that elderly Americans use a lot more medications than we do. And they are positioning themselves to be on every street corner to capture their prescription dollars.

So how do we take advantage of this?

We redirect some of our dollars from our favorite Vanguard funds to health funds. We still need to KEEP IT SIMPLE – but so simple as to miss out on what should continue to be a very profitable sector. So here are a list of a few of my favorites to invest in:

Here are some mutual funds and ETFs that I believe are strong funds:

• Vanguard Health Care Fund (VGHCX) – Buy directly through Vanguard. You’ll need at least $3000 to start up and you’ll pay a HUGE 0.34% in fees. This is ridiculous for Vanguard, but when you realize that the current one year returns are 12% (as of 10/6/2015) while everything else “safe” in Vanguard is negative, well, I’ll let you do the math…
• Vanguard Health Care Index Fund ETF (VHT)– buy directly through TD Ameritrade (or your favorite brokerage) and you’ll only pay 0.12% in fees. Now that seems much better than VGHCX…but the funds are not the same. VHT isn’t tracking as well at the VGHCX, but its 3-, 5-, and 10-year averages still beat VTI and for those looking to get their feet wet and get invested, it’s a great way to go (be careful – it’s not a no fee ETF, at least with TD).
• And my favorite – even though it is closed to new retail investors and it is expensive (0.77%) – is T. Rowe Price’s Health Sciences Fund (PRHSX). If this is still available in your 401(k), 403(b), or any other portfolio, snap it up. 16%+ on the year, and 27%+ as 3- and 5-year averages.

Folks, health care costs are going to continue to spiral up, just due to the greying of the baby boomers (and eventually the millennials). Drug companies may see their profits curtailed a bit after the next presidential election, but even if they are, there is plenty of meat left for investors. Don’t worry about them – they will survive.

So I hope I have swayed you to go out there and do some research, and see what you think. You may just join me.

Tell me what you think. Are you going to buck the trend and chase that pig?

 

* The problem with the interwebs is that snarkiness can just come off as complete dickishness. I’m just trying to goad you to keep reading. So if you jumped down here, back to the top with you! If this doesn’t make any sense to you, you missed the asterisk at the top of the page.