It’s one of those good problems to have. Canadians are sitting on an enormous trove of cash – the byproduct of a pandemic savings boom and a precarious economic state.
For four years now, Canadians have been frantically socking away money in bank accounts and, more recently, in term deposits such as guaranteed investment certificates.
Now, having a gigantic cash buffer may feel right. These are crazy times. The pandemic awakened a fear of the kind of disasters that felt relegated to history. More specifically, the threat of a recession, while diminished compared with this time last year, is very much alive.
But we need not turn into cash hoarders. There are nest eggs, and then there is the financial equivalent of stuffing your kitchen cupboards full of stacks of old newspapers.
Over the past four years, Canadians have built up excess savings of close to $400-billion, or 13 per cent of GDP. It’s an enormous backstop, by any standard.
Long-term money belongs in risk assets – a mix of stocks and bonds, generally speaking, which has a very convincing track record of building wealth over many years.
This presents many investors with a dilemma – how best to get their own excess savings into the market at a time when stocks and bonds are quickly picking up speed.
This year is on track to end on a high note. With inflation continuing to head in the right direction, the prospect of interest-rate cuts has invigorated financial markets over the past couple of months.
The Dow Jones Industrial Average notched an all-time high on Tuesday. The S&P 500 index saw eight straight weeks of gains for the first time since 2017. The S&P/TSX Composite Index is having its best run of the year, up by 12 per cent since bottoming out almost two months ago. And long-term government bond yields in Canada and the United States have seen huge moves downward, which translates to higher bond prices.
What is a cash-heavy investor to do? Wait for a better entry point? Ease your money into the market gradually? Either would be a mistake. Research shows that when you have a lump sum to invest, the best move is to do it is all at once, right away.
That would be a pretty abrupt change for those who have been stuffing their money into savings accounts and GICs for the past couple of years.
That wasn’t necessarily a bad play. For the first time in years, you could make money on cash even after inflation. A five-per-cent yield has been a huge draw.
Since February of 2020, Canadians have shovelled about $260-billion in excess savings – that is, savings over prepandemic levels – into term deposits, including GICs. Another $130-billion sits in demand deposits as of the end of October, according to RBC.
Falling interest rates are sure to take a lot of the steam out of the GIC craze.
But just plowing that money into the market might feel a lot like “buying high.” And isn’t that a cardinal sin of investing? Not necessarily.
The alternatives to investing your money in a lump sum are dollar-cost averaging or buying the dip. A few years ago, Benjamin Felix, portfolio manager and head of research at PWL Capital, ran several scenarios comparing the different options.
Buying the dip involves waiting for the market to decline by 10 or 20 per cent before pulling the trigger. But studies consistently show that the gains you forfeit while waiting for the right moment outweigh the benefits of buying low. This is true even when markets are at all-time highs. Across several different countries, Mr. Felix found this approach trails lump-sum investing by a wide margin.
Other investors may choose to deploy their extra cash in increments over a certain period of time, like a year.
But again, the results here are inferior to investing in a lump sum, about two-thirds of the time. The problem is that it is impossible to know ahead of time when dollar-cost averaging would be a more profitable course. Even when markets are high, it loses out most of the time.
“There is a strong statistical argument to avoid dollar-cost averaging unless it is absolutely necessary from a psychological perspective,” Mr. Felix wrote in a report.
Let’s say you put a whack of money into stocks, only for the market to promptly take a nosedive. It’s certainly possible. You’re probably going to feel pretty rotten about your decision, looking at all your money that vanished into thin air.
That doesn’t mean it was the wrong decision. The stock market is a proven growth machine. Tapping into that force should be the motivation and any delays will probably only hurt you in the long run.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
