According to a BlackRock survey, Canadians hold 60% of their portfolios in cash, and 45% of Canadians planned to add more money to their cash deposits and savings. Now there are some good reasons for holding cash, like having an emergency fund, or holding onto cash to pay for short-term goals. But having 60% of their portfolios in cash means that Canadians will have to save more to achieve their goals. If the return they earn on their cash doesn’t keep up with inflation (for example those half a percent savings accounts, that are well below the inflation rate of about 1.5%), then many Canadians are actually losing purchasing power by holding their portfolios in cash.
So you know when your parents and grandparents talk about how a loaf of bread cost $0.10 back in the day…that’s inflation. As time goes on, the price of most items increases, meaning the value of your money decreases. This is why your wage increases as time goes on (hopefully), and you need to invest your money so that you’re not left with the same amount of dollars you started with. Think about the $5 coffee you buy today. In 30 years, even with inflation at only 2%, that coffee will cost you $9. If you put your savings under your mattress, then you had better save an extra $4 (almost double). Alternatively, invest the $5 in something that at least keeps up with inflation. For more detail on inflation, watch my colleague, Nancy Graham’s video.
Over-time your $1 will still be one dollar, whereas things might cost $13 after 90 years, as shown in this chart! If you invest in things like Treasury Bills (similar to high interest savings or short-term GIC’s), you’ll do a little bit better than inflation. People often focus on the risk of holding equities during short periods, like 2008/2009, but you can see that you are rewarded for taking on that risk, by earning a substantially higher return above T-bills over the long-term. Risk and return are related. In order to earn higher returns, you need to take on additional risk. Otherwise, we’d all be earning 15% in super safe GIC’s if we could!
