Canadians hoarding cash now could come up short later, analysts warn
Pay down debts first, experts suggest; but if you have extra cash, make it work for you
Manic markets, bottom-barrel oil prices, the lingering silhouette of the last financial crisis — for whatever reason, more Canadians appear to be steering clear of turbulent stock markets and clinging to their cash.
That's according to a recent report from CIBC World Markets that found personal cash positions were at a record high at the end of 2015, up 11 per cent over the past year. Canadians are sitting on an estimated $75 billion of "excess cash that they would typically have invested," writes CIBC deputy chief economist Benjamin Tal.
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Whether it's a blip in the data or the start of a bigger trend, financial analysts warn that hoarding cash in the brave new world of discouragingly low-yield bonds and heavy debt loads could leave many people without enough money for what some argue will be increasingly expensive retirements.
Part of the problem is that "the classic theory of investing," which culminates in a move toward more stable investments over time, "just isn't working anymore," says Eric Kirzner, professor of finance at the University of Toronto's Rotman School of Management.
"You really have to hold a portion of your portfolio in stocks if you're going to meet your objectives in the long run because yields from conservative investments like, say, government bonds, after inflation and after tax, are close to zero.
"The question is where do you turn? You have to go, in my opinion, to a balanced portfolio — one that includes stocks."
If people think their wealth is at risk, if people think their business is at risk, then it makes sense.- Lorne Steinberg , financial analyst
Increasingly, however, some Canadians are shying away from risking their hard-earned cash in volatile stock markets, says Russ Koesterich, global chief strategist with the investment firm BlackRock. He notes it is "not just a Canadian phenomenon."
"Investors have been holding disproportionately large amounts of cash since the financial crisis of 2007/2008, and clearly events in the last six months or so have not helped," he says.
In the shadow of 'the lost decade'
Falling oil and commodity prices, and the dizzying instability of Chinese markets, have hit Canada's resource-based economy especially hard. On top of it all, the recent woes come after only a brief respite from "the lost decade" that began when the dot-com bubble burst in 2000.
"The headlines, blogs and social media all add to the fear in a time like this. We have investors that just don't trust the market," explains Kirzner.
Last year, BlackRock published the results of an online survey of 2,000 Canadians aged 25 to 74 who were either the sole earner or one of two breadwinners in a family. Half of respondents (51 per cent) equated investing in stocks with gambling and only 35 per cent agreed that they were "knowledgeable about investing."
The recent CIBC World Markets report attributes the rise in cash holdings to risk aversion. Interestingly, people 35 years old and younger hoarded the most money, as a proportion of their total wealth.
"But strikingly, those under 35 — the farthest away from retirement — are holding twice as much cash as those over the age of 65, about 33 per cent versus 15 per cent," CIBC said in a release that accompanied the report.
The 35 and under demographic, according to Koesterich, has grown very wary of putting cash into stocks. While the savings necessary for a decent and dignified retirement are debated, young people's timidity could leave them short on cash down the road.
"If they are at a time in their lives when retirement is 25 years away, yes they will experience volatility. But if they keep savings in cash for a long period of time, they are going to forgo a lot of returns," he says.
"Even if it's a difference of only two or three per cent, over a 20-year period, the compounded effect of that will make a big difference in the terminal value of your retirement portfolio."
'The headlines aren't good'
BlackRock found that the Canadians it surveyed kept about 60 per cent of their total wealth in cash holdings, though the majority said they think that proportion should be closer to 30 per cent.
Lorne Steinberg, president of Lorne Steinberg Wealth Management, says a healthy number would be about 10 per cent, but it's "normal behaviour" to start hanging on to more cash "when the headlines aren't good."
"There's nothing inherently concerning about it," he adds, noting that a shaky real estate market in many parts of the country and fears over the future of resource industries could be contributing to the increase reported by CIBC.
"If people think their wealth is at risk, if people think their business is at risk, then it makes sense."
Families across the country are also carrying alarmingly high household debt, while many young people are straddled with burdensome student loan repayments. Keeping liquid cash at hand to pay down debt "is absolutely the first thing you should do," Steinberg notes.
Of course it's impossible to quantify the psychological reasons people may be hoarding their money, but behaviour could change if things start looking up again for Canadian investors.
"If the news gets better, there might a flow of cash back into the markets," Steinberg says.