Sitting on too much cash can cost you

There are better ways to protect yourself from market volatility

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From the April 2016 issue of the magazine.

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We Canadians seem destined to repeat past mistakes when it comes to hoarding cash during times of increased market turbulence. In fact, CIBC economists Benjamin Tal and Royce Mendes estimate we’re currently sitting on a record $75 billion of extra cash. This is money we’ve been building up since the 2008 recession and that we would have normally invested. It represents a whopping 10% of the liquid assets held by Canadian households. Strikingly, this trend isn’t being driven by any particular age group, Tal and Royce note. As the chart below shows, even those under 35 are holding more cash than ever.

Why should this concern you? While moving assets into cash may help guard against short-term market volatility, don’t forget it comes with the risk of missing out on market rebounds. Invariably, investors wind up buying high and selling low. We did this following the 1987 and 2001 corrections, in which investors sat on increased cash positions while the market gained more than 20% and 30%, respectively. And right now, we’re doing it all over again.

Everyone's hoarding more money


One comment on “Sitting on too much cash can cost you

  1. Hello. I am probably one of those who has too much cash whiling away in an account. I estimate its around 20% of my savings-the rest in a fairly aggressive portfolio (68/32 equity/bond). I’m about 5 +/- years away from retirement and also understand the need for cash to draw on during volatility or slumps in the market when retired. Keeping this in mind I am still working for a few years so wonder whether its wise to invest in something a little more lucrative with the “fallback money”.


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