Hoarding cash? There are options to make better use of your money

If you’re too scared to invest in the stock market, pay down your debt.

Or, invest in your education or qualifications. Or, start a business. Canadians are clinging to cash these days, which means they’re wasting opportunities to make better use of their money.

The stock markets are scary for sure right now. The Canadian market is only marginally ahead of where it was 10 years ago, and it’s thousands of points below its 2008 peak. Cash in the form of various types of savings accounts and money market mutual funds is a safe alternative. It’s also the least efficient use of your money short of sticking it in a drawer (let’s retire the mattress cliché, okay?).

The vast majority of people holding cash are earning less than the inflation rate, which was 1.6 per cent in December. For the money you’re using as an emergency fund or saving for short-term goals such as buying a house or a vacation, that’s acceptable in exchange for zero risk. But it’s not a good enough return for money you’d otherwise be investing for long-term wealth building.

A recent CIBC World Markets estimated there’s a record $75-billion in excess cash, or money that would otherwise have been invested. The report includes the usual scolding – people holding cash are going to miss out when the stock market turns around. They will. It’s a fact. The worse Canadian stocks get, the more tempting they are for people investing with a time horizon of 10-plus years.

But the fact that there’s $75-billion in excess cash right now suggests investors aren’t buying the conventional investing wisdom. That’s understandable, because the investing industry can be so full of it. In good times, they quote Warren Buffett’s comment about being greedy when others are fearful, or Sir John Templeton’s remark about buying when others are despondently selling. But when the market falls, they find excuses not to buy. Don’t catch a falling knife, they say. Or, it’s not the time to buy because we haven’t seen market capitulation.

This discrepancy results from the fact that a lot of investment-industry people are worried about their short-term results, whereas Mr. Buffett and Mr. Templeton took a long-term view. What about those lousy 10-year TSX numbers? Add in dividends to get a total return and you end up with 10-year annualized gains of 4.4 per cent. Not impressive, but far from catastrophic.

My wife and I have a small block of savings that we’re putting into the market right now. On a long-term basis, it seems the best use of that money. Disagree? Then choose something else productive to do with your money instead of letting it idle in a savings account.

Paying down debt is a good thought because you’re guaranteed to get results, unlike an investment in stocks. At roughly 20 per cent, credit-card debt is begging to be put out of its misery. You might also knock down that line-of-credit balance you’ve been carrying for years, or make a lump-sum payment on your mortgage.

Interest rates on mortgages and lines of credit are lower than the rate of return you should expect long term from stocks. Never mind that if you’re allergic to stocks. Paying down debts is a better use of your money than keeping it in cash.

Another way to put your excess cash to work is to improve your education. A master’s degree or college certificate that builds your long-term earning power is an investment more than an expense. If you’ve been thinking of starting a business, full-time or as what personal finance bloggers call a “side hustle,” then you have still another productive use for your excess cash.

The worst thing you can do with your cash is let it sit around while you wait for inspiration. Here’s what’s going to happen if you do that. The stock markets will rebound and pile on big gains in a short period. Feeling regretful, you’ll jump in late to the market. When the next down cycle happens for stocks, you’ll once again feel like you didn’t get your fair share of gains and start piling up money in cash.

Break the cycle. Buy stocks, or find something else useful to do with your extra cash. The way the economy’s going, a decent return from savings accounts is a long way off.


Canadian investors hoarding $75B in cash
(BNN Video)

Courtesy: The Globe And Mail

10 Replies to “Hoarding cash? There are options to make better use of your money”

  1. I would rather take advice form Jesse Livermore also known as the Boy Plunger and the Great Bear of Wall Street, was an American stock trader. He was famed for making and losing several multimillion-do­llar fortunes and short selling during the stock market crashes in 1907 and 1929.

    When just about everyone in the markets lost money in the Wall Street crash of 1929, Livermore was worth $100 million after his short-selling profits. This was back when a million really bought something. According to Jesse:

    “First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move.”

    “Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.”

    “There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time.”

    “If you can’t sleep at night because of your stock market position, then you have gone too far. If this is the case, then sell your position down to the sleeping level.”

    “…every once in a while you must go to cash, take a break, take a vacation. Don’t try to play the market all the time. It can’t be done, too tough on the emotions.”

  2. As part of a sound money management plan, many years ago I decided to get ahead of all debt. So the cash had to be in the bank before the bills were due. Credit card bills were paid in full each month so that zero interest was incurred. It was difficult initially but that practice has sure paid off over the years. But I wonder how long the credit card companies will keep it up. Or the banks giving senior discounts will continue.

  3. $75B may sound like a lot of money but relative to the Canadian economy it’s chicken feed. The real problem is that many families live paycheck to paycheck and have too little cash available to cope with unforeseen circumstances.

  4. In a period of Deleveraging, Dr Gary Shilling states “you win by not losing”. I’ll follow that advice and hold my cash. As stated in the article “That’s understandable, because the investing industry can be so full of it”. I have learned not to follow the BS the investing industry spews as wisdom and done well.

  5. well, TSX went down 12% last year, therefore my cash earned me 12% (minus inflation) and i dont have to wait for the rebound !

  6. You Get What You With markets are volatile as they are right now, and the global economy sputtering uncertainly, and banks offering interest rates so low you’re almost better off sticking your money “under the mattress”, why would anyone want to “play the market”?

    To keep financial analysts and money managers in business? -Not on my dime.

    Plus, as somebody else has pointed out in this comment thread, the vast majority of working and middle class people are now living paycheck to paycheck.

    Investing? -They’re investing in rent or a mortgage. They’re investing in groceries.

    Anything else is beyond their reach, and therefore irrelevant to them.

  7. The belief that the stock market will always follow the same historical cycles is blind faith that disregards demographics and other world trends. How’s that philosophy working out in Japan, where the stock market index is currently less than 50% of where it was at in 1991. Look at North America’s demographics in comparison to Japan’s in the early 1990’s…..see any similarities? But such a long term market decline couldn’t happen to us right? I think the boomers’ exodus out of equities will continue for many years……. Who is going to replace that money in the market? The Millenials? Not so sure about that. Stocks…no thanks!

  8. Sorry, but I’m just a few years to retirement and want to preserve the assets I have. My workplace DC plan is already in the markets (although I have several fund choices including bonds), so I want low risk for my personal money. Just moved most of it to Implicity Financial High Interest Savings. Getting 1.75 % which is more than the 1.6 % alluded to in the article. Call it the mattress, but at least I get a good night’s sleep every night!

  9. Not mentioned, if your cash happened to be sitting in USD for the past few years….well, you just made 20%. Not ALL cash is bad.

  10. Concerned The vast majority of the people hoarding cash are seniors. We were careful with our money, that’s why we have some. We lived our lives with the belief that if we worked hard and were frugal we could save a million $ or so, invest it at a safe 10% and live well in our retirement. So we’ve got the cash, but where is the safe 10%?
    We don’t have debt.
    Most of us aren’t interested in going back to school.
    We don’t want to start a business, we already worked hard enough.
    And most of us were self employed, we don’t have a pension, those savings are all we have. We will deploy it as the risk/reward ratio improves. In the meantime, our sleep at night portfolio means the cash stays in the mattress.

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