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Canada’s household savings rate soared to 28.2 per cent in the second quarter, up significantly from 7.6 per cent in the first quarter, when the COVID-19 shutdowns started, and an average of 3 per cent for all of 2019.

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Volatile stock markets and reduced consumer spending during the COVID-19 pandemic have resulted in many Canadians sitting on extra cash, wondering how and when to put it to work.

Canada’s household savings rate soared to 28.2 per cent in the second quarter, according to Statistics Canada, as the pandemic forced people to stay home. It was the highest savings rate “by far” in the past 60 years, according to Doug Porter, chief economist and managing director at Bank of Montreal.

In comparison, the savings rate was 7.6 per cent in the first quarter, when the COVID-19 shutdowns started, while the average for all of 2019 was 3 per cent.

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In total, Canadians added a whopping $127-billion to savings and chequing accounts and term deposits in the first half of 2020, up from an average of $32-billion during the same period in the previous three years, according to data from Investor Economics.

Mr. Porter estimates the savings rate to pull back to about 15 per cent in the third quarter and 11 per cent in the fourth quarter, “both still very high rates.”

That’s potentially more money that can be invested, alongside cash many investors have in their portfolios, waiting for the right time to get back into the stock market. Adding more money to savings accounts is unappealing to some given the record-low interest rates that sit well below inflation.

As such, financial advisors recommend a prudent approach when investing cash in these unsettled times, not only in light of the threat of a second wave of the pandemic in the weeks ahead, but the uncertainty around the U.S. presidential election in November.

Mary Hagerman, portfolio manager and investment advisor with the Mary Hagerman Group at Raymond James Ltd. in Montreal, recommends retirees and others in the money-withdrawal stage of their lives have about two years’ worth of cash set aside to withstand the potential of a prolonged market downturn at any time.

That money should be in a high-interest savings account or guaranteed investment certificates – even if the interest rates on these products are low.

“I would caution investors that there are no alternatives to cash,” she says. “Don’t give in to the urge to be too creative with what’s supposed to be your safe money.”

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For investors who are in the wealth-accumulation stage, Ms. Hagerman recommends investing excess cash either in regular intervals, such as a set amount each month (known as dollar-cost averaging), or when there are major stock market drops or corrections.

“I’m not suggesting people try to time the market, but sometimes the market talks to you and you have to listen,” she says.

For example, Ms. Hagerman says she invested some funds set aside in cash after the markets plummeted about 30 per cent in March, treating it as a buying opportunity for her clients.

The markets have since bounced back from their lows in March, but are still volatile, which has Ms. Hagerman recommending investors remain cautious.

“Whatever you do, go more gradually because we haven’t seen the end of volatility and the markets never go straight up,” she says.

Dan Bortolotti, portfolio manager at PWL Capital Inc. in Toronto, agrees that investing small amounts gradually is the best approach for investors who are nervous about making a large trade.

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“Don’t try to do on sentiment, waiting for when it feels right or until the market goes down again. That’s all just cleverness that doesn’t usually work out,” he says. “If you’re a long-term investor, the day you invest your money is less important than how long it stays invested.”

That said, he also thinks having a chunk of cash on hand for emergencies, even if it’s earning a very low interest rate, is a wise strategy. The amount depends on your monthly expenses and what your long-term goals are, such as having a family or retirement.

“If you have some extra cash, don’t immediately assume it has to be invested,” Mr. Bortolotti says. “March was a reminder of the importance of having an emergency fund and the enormous flexibility it gives you. … Try not to dwell on the low interest rate. It’s not a big deal for your emergency fund.”

He says holding cash will also give investors more peace of mind when the market drops again.

“People who have cash on hand and a long-term investment plan are much less anxious during a period like we’ve been going through,” he says. “If you have no cash on hand, you haven’t thought about a long-term plan and are buying [investments] at random, it’s not surprising you panicked in March and April because you were in a bad situation.”

Kash Pashootan, chief executive and chief investment officer at First Avenue Investment Counsel Inc., says the strategy for deploying cash depends on investors’ investment goals and style, including whether they’re a trader with a short-term investment timeframe, or an investor who’s in it for the long haul.

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“There’s no right answer, but you can’t be a trader and an investor because they conflict,” he says.

For example, he says an investor might see Canadian banks as a good buying opportunity in these markets, given their recent drop. iShares S&P/TSX Capped Financials Index ETF (XFN-T), which includes the big banks and insurance companies, is down 11 per cent year to date as of Sept. 9.

“A trader might not like Canadian banks, which could see writedowns of soured loans [in the short term],” Mr. Pashootan says. “An investor would look at the same Canadian bank stocks and say, ‘I’m buying them at a discount to where they were at the beginning of the year and with a dividend yield of 5 per cent or more.’”

Mr. Pashootan was holding about 15 per cent cash in his firm’s equity portfolios in mid-February, when COVID-19 started to spread globally, increasing that position to around 50 per cent by mid-March as volatility continued to rise. He began redeploying those funds steadily starting at the end of March. Today, his firm has about 12 per cent of its equity portfolio holdings in cash.

While his investment strategy has been a success in this market so far, he says investors will never feel confident when they decide to pull the trigger on putting more cash to work the market, especially amid the current volatility.

“You won’t just wake up one day and say, ‘It feels like a good day to invest in equities,’” he says. “Uncertainty is the new norm. Once we get through COVID-19, we’ll have another event – and then another after that.”

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Mr. Pashootan also recommends that investors make the decision on when to invest their cash based on their personal objectives and time horizon.

“If you’re using the money in the next 18 months to buy a house, you shouldn’t be [invested] in equities,” he says. “But if this is money you’re thinking of for the next three to five years, then this is a great opportunity to put it to work, taking positions in high-quality companies at reasonable prices.”

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