Canadians are holding a record $75 billion in extra cash and continue to sock away money at a rate not seen in more than four years, finds a CIBC World Markets report.
This cash is extra money Canadians normally would invest in the markets, which could cost them billions in lost investment returns.
“We are currently witnessing the creation of personal cash buffers larger than at any other time on record,” says Benjamin Tal, deputy chief economist at CIBC World Markets. “From a broader perspective, the Canadian economy is losing out because capital is not being allocated efficiently.”
Since the 2008 crisis, excess cash reserves held by Canadians have risen notably. And at the current level of $75 billion, they represent almost 10% of the total value of overall personal liquid assets in Canada.
In the past year alone, cash positions are estimated to have risen more than 11% – the fastest pace since early 2012. An overly sour view of Canada from foreign investors, combined with recent volatility, has made for a tough investing environment, the report says.
“Consistent with past behaviour, Canadian investors have used current market volatility as an excuse to let cash pile up in their chequing and savings accounts,” says Tal.
The report finds all Canadians, young and old alike, are making cash a bigger part of their portfolios. 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% versus 15%.
“While holding cash can guard against short-term spikes in volatility, it’s certainly a long-term drag on portfolio returns,” says Tal.
While the October 1987 stock market correction lasted two months, investors added to their cash position for 18 months following the crash, during which time the stock market rallied more than 20%. Following the 2001 flight to safety, overall liquidity positions surged by more than 30%, but again, investors failed to adjust their cash levels when the market recovered, maintaining record high cash levels during the bull market that began in early 2003.
“While the rush to cash during periods of volatility is understandable, the problem is that Canadians maintained those elevated cash positions for far too long after markets rebounded,” says Tal.
Likewise, the current rush is building on cash holdings that spiked following the 2008 market crash.
“What’s more troubling than holding cash for long periods of time is that investors often move into it at precisely the wrong time,” says Tal. “The usual response is to take money off the table at the worst possible time.”
Over the past five years, the TSX Volatility Index has peaked over the 20 mark eight times. However, in the 90 days following the peaks, the S&P/TSX Composite Index returned an average of 9%.
“We know that from the data on personal deposits that Canadians respond to adverse shocks by moving into cash,” says Tal. “But, that rebalancing means that investors are buying high and selling low.”