During the 1990s stock market boom a common explanation for the bubble was "demography". The idea was that flows into stock markets were being boosted by the saving behaviour of the "baby boomers", writes Chris Johns

The bulge in the population caused by the temporary post-second World War surge in the birth rate had hit the point in its life-cycle where saving rates are usually at their highest; people in their 30s and 40s tend to save a lot. In the US, at least, retirement saving tends to flow into the stock market.

The corollary of this explanation of equity prices is that huge downward pressure on stocks is to be expected from about 2010 onwards, when the baby boomers start to retire; the switch from saving to spending will prompt large sales of all those shares acquired during the high earning years.

Other aspects of demography have also been used to try to understand - and even forecast - stock market behaviour.

For example, the ageing of Western populations often pops up as an investment theme in the marketing literature of many fund managers.

They say things like "a known trend is the rapid ageing of populations, particularly in Europe and Japan; this will boost the demand for drugs, nursing homes and coffins. Savvy investors can exploit these shifting patterns of consumption".

Fund managers are seeking to identify what the growing ranks of affluent retirees will buy.

Beyond the obvious - holidays, golf, and drugs - there is not a long list, and the obvious is always hard to exploit.

As it happens, it is possible to use demography as an investment theme but it requires a little more sophistication than simply looking at what older people are likely to consume.

An example of how the simple approach can come unstuck is to be found in the drugs industry.

A straightforward tactic of buying pharmaceutical company stocks on the back of ever-increasing demand for drugs might seem sensible but has recently run into problems.

Drug companies have few blockbuster pills in the pipeline and their profit margins are under attack from generic competition, the erosion of patent protection and the tendency of Americans to go shopping for their prescription medicines in Canada.

Online Canadian pharmacies now seem to send as much junk email as the more salacious spammers.

More generally, governments and regulators have decided, for now at least, that pharmaceutical company profit margins are too wide.

Demography may well boost the profits and share prices of the world's large drug firms but we will probably have to wait a long time for the effects to show up.

The point about time is an important one. Some researchers have found strong effects on equity prices from demographic trends, but only after those trends have been running for five or even 10 years.

For example, an investment strategy that sought to exploit the predictable age-sensitive consumption patterns of the baby boomers (they needed lots of toys when young and will need nursing homes pretty shortly) has been found to produce extremely impressive returns.

But those positive returns were only available to the most patient investors.

The lesson here is, first, that anyone who likes the shares of pharmaceutical firms because we are all going to need lots of drugs should use recent relative weakness in the sector as a buying opportunity - but do not expect to make money on anything other than a very long-term time horizon.

Second, even if your investment idea is a good one, move beyond the obvious.

More generally, and surprisingly, there is a growing body of evidence that supports the idea that share prices were indeed boosted in the 1990s by demographic effects.

Other factors were at work as well, of course, but the predictable saving behaviour of a large number of people entering the 30-50 age bracket did affect stock prices in a material way.

That evidence also supports the idea that these same people will be selling shares from 2010 onwards to fund their retirement.

There is little support for the notion that stocks face a "demographic meltdown, come the next decade, but there will be headwinds.

Incidentally, much of the research that shows how share prices have been affected by changing demographics also applies to house prices.

The bad news for those who are hoping for their property portfolio to fund their retirement is that there are lots of other people in the same boat - and not enough younger people ready and able to buy or rent those properties once they come on to the market.

Another interesting although controversial conclusion reached by demographic researchers is that it is utterly pointless to make all of us save more for our retirement.

While this works for the individual, it does not work for the whole economy: the more people save now, the slower the current rate of economic growth and the lower will be profits and the stock market.

A lower stock market negates the higher savings, so the amount of money available to retirees from their investments is not materially affected by the aggregate decision to save more.

If there is a solution to the retirement crisis it is to raise the retirement age rather than to scare schoolchildren into starting a pension plan.

Demographic issues present both opportunities and threats. Different countries face different issues.

Many people were surprised to find ageing populations in many of the new EU accession countries.

The countries with the least problems are typically in Asia, where there are plenty of investment opportunities.

Closer to home, the biggest problems are to be found in Europe.

In the United States, at least, one important factor inhibiting the stock market for at least the next decade will be the growing awareness that natural buyers of equities are becoming natural sellers.