We were talking about this recently when Nancy and I were having our first meeting with a new client. In 1989 we were earning 7% interest on our savings accounts. Imagine how much money you would sock away right now if you could earn 7% with no risk.
It has become very difficult in the last few years to find a safe investment that can earn us a return of more than 1%. The stock market can be frightening. So you prefer to sit on your cash.
The CBC ran a piece last year saying that Canadians are hoarding cash at an alarming rate, to the tune of $75 Billion. Is this a good idea?
The short answer is NO. Here's a couple of reasons why:
1.) Time in the markets: There's an underlying belief that we sometimes have that we can "time the bottom" and jump back in. The problem is our timing is usually off and we end up missing that boat.
2.) Dollar cost averaging: When you pull out of the markets you miss the opportunity not only to be receiving dividends but also to be reinvesting those dividends at a lower cost. This reduces the average cost base of your stocks and investment funds.
3.) Diversification: When you have a properly diversified portfolio you are able to better handle market volatility. Having the correct asset mix (stocks, bonds, cash), sector (industry) and geographic (some Canadian, US and Global) allocations in a well-diversified Portfolio is what matters most. Those who have this don't panic and pull their money out when markets are dropping because their portfolio is much more stable. Managing volatility is the number 1 concern with retirement investing.
What are some alternatives to Hoarding Cash and Avoiding the Pain of Financial Hoarding?
1.) Stay invested and stay the course, especially if you have time on your side and it will be several years before you need to withdraw the money.
2.) Continue to add more when prices are low. The markets run in cycles and we are on an upswing right now, but that will change soon enough. You'll never pick the exact bottom so don't try.
3.) Pay off DEBT, especially anything with a high-interest rate. If you have a Home Equity Line of Credit it would be a better plan to place all excess cash onto its balance while you are waiting for new investment opportunities. Parking cash is like parking your dreams - it's not doing anything for you so you can't let it sit idle very long. Sitting on your cash will not benefit you; you must make your money work for you!
We can help you create a sustainable and predictable cash flow from your portfolio in the most tax-efficient manner to ensure you never have to worry about running out of money.
Remember "Life is like a Taxi - the meter keeps running whether you are going anywhere or not"
