Sitting on the sidelines for too long comes with a personal price tag
TORONTO, Jan. 26, 2016 /CNW/ - 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 new CIBC World Markets report.
The report finds Canadians, nervous of volatility in the financial markets, have amassed cash reserves of $75 billion as of December 2015 -- extra money that they 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 and co-author of the report Cashing In On Fear with Senior Economist Royce Mendes. "From a broader perspective, the Canadian economy is losing out because capital is not being allocated efficiently."
Since the 2008 global financial crisis, excess cash reserves held by Canadians have risen notably and at the current level of $75 billion, they represent almost 10 per cent 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 per cent – the fastest pace since early 2012.
An overly sour view of Canada from foreign investors combined with recent volatility in stock markets around the world 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 Mr. Tal.
The report finds that 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 per cent versus 15 per cent.
"While holding cash can guard against short-term spikes in volatility, it's certainly a long-term drag on portfolio returns," says Mr. 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 per cent. Following the 2001 flight to safety, overall liquidity positions surged by more than 30 per cent, 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 Mr. Tal.
Likewise, the current rush to cash is still 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 Mr. Tal. "The usual response is to take money off the table at the worst possible time."
Over the past five years, the S&P/TSX Volatility Index, a gauge of investors' fear, peaked over 20 eight times, yet in the 90 days following the peaks, the S&P/TSX Composite Index returned an average of 9 per cent.
"We know that from the data on personal deposits that Canadians respond to adverse shocks by moving into cash," says Mr. Tal. "But, that rebalancing means that investors are buying high and selling low."
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_2016-0126.pdf.
CIBC is a leading Canadian-based financial institution with 11 million individual, small business, commercial, corporate and institutional clients and three major business units – Retail and Business Banking, Wealth Management and Capital Markets. CIBC Capital Markets provides integrated global markets products and services, corporate and investment banking, and top-ranked research to corporate, government and institutional clients around the world. Visit www.cibccm.com for more information on CIBC and CIBC Capital Markets. News releases are available at www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce