Holding lots of cash is a fake security blanket, but you won’t know it until you retire - The Globe and Mail

Cash is the new toilet paper.

No, this is not a call to buy gold and hard assets because you can’t trust cash. If anything, people put too much trust in cash these days. They’re hoarding it in a way that calls to mind the pandemic stockpiling of toilet paper more than four years ago.

People worried about scarcity and uncertainty back then and a cupboard full of toilet paper seemed to be an answer. Today, it’s money in guaranteed investment certificates (GICs), bank savings accounts and equivalent products for investors to hold cash.

Safely parked cash is your financial plan’s concrete foundation. But overdoing it on cash involves tradeoffs that may not be apparent at a time when it seems logical and comforting to keep your money safe. You may actually be adding future financial stress.

A report this week from CIBC Capital Markets says there’s roughly $250-billion in extra savings held in GICs and investment products such as money market funds that are designed for investors to park cash. Interest rates have been falling, yet CIBC found this amount has not moved meaningfully.

In fact, the flow of money into certain safe harbours is increasing. The consulting firm McVay and Associates says balances in bank accounts have been growing since April, and GIC balances are up 15 per cent this year. That’s down from 36.9 per cent growth last year, but still strong.

Pollster David Coletto wrote in a recent edition of his InFocus newsletter about the scarcity mindset, which means a focus on immediate needs over long-term concerns such as climate change. Cash hoarding seems tied to the feeling of scarcity as well.

Like so much in the economy today, the preference for cash is a story in two parts. Affluent people are parking accumulated cash they’re simply waiting to spend, while others hold cash for security. A recent Business Insider article talked about how millennials in particular are holding too much cash.

For a comparatively young generation, millennials have seen a lot of financial adversity in the 2008-09 financial crisis and the recent surge in inflation and mortgage rates. But cash is suitable mainly for short-term savings goals and emergency funds, where a modest risk-free return is preferable to the potential for higher returns with a significant chance of losing money.

If you keep money for longer-term goals such as retirement in cash, recognize the cost now and in future. Low rates of return mean you either have to contribute more to your savings to achieve your goals, or accept having less money in the end. Someone who saves $10,000 a year and makes 3-per-cent interest annually would end up with about $287,000 after 20 years, compared to around $400,000 for someone who averaged 6-per-cent investment returns.

Actual stock market returns lately have been off-the-charts great. Canada’s S&P/TSX Composite Index has produced a total return of 26.7 per cent for the 12 months to Sept. 30, while the S&P 500 delivered about 35 per cent and the MSCI EAFE index for international markets made almost 20 per cent. The benchmark for bonds, the FTSE Canada Universe Bond Index, has a 12-month gain of nearly 13 per cent.

More realistic numbers provided to financial planners for their work use a long-term average annual return of 6.4 per cent for the Canadian market and 6.5 per cent for foreign markets. The long-term cash return is projected at just 2.4 per cent.

Here’s a three-part plan for moving money out of cash:

-If you’re worried about market crashes, set your calendar to remind you to make transfers of cash into your investments on a monthly or quarterly basis.

-Turn cash into contributions to your investments after big stock market declines, say 2 to 3 per cent or more in a day and worse; CIBC expects a lot of excess savings to go into dividend stocks.

-Consider a lump-sum contribution – a study shows they have produced better results than averaging into the market with multiple smaller investments.

Keep your emergency fund in a high-interest savings account, and do the same with money you are saving for events that will happen within five years. Invest money for retirement and other long-term goals.

A final word for affluent money hoarders: Spend some dough, maybe? The economy could use the help.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.