You can tell we haven’t had a serious stock-market correction for a long while by the way people chafe at the idea of keeping money safely parked in cash.
A Globe and Mail reader e-mailed the other day to ask what to do with nearly $100,000 in cash left over after the sale of a home. She’s making some big changes in her life, so there’s definitely some uncertainty ahead. Yet the cash option isn’t getting much traction. “Seems a waste to let the money sit in [my] account until I decide what to do,” she said.
The Canadian stock market has been sluggish in recent years, but the U.S. market has been strong. There’s also been a lot of money made in marijuana stocks, cryptocurrencies and other niches. It all adds up to an atmosphere in which people can easily imagine that money is being made all around them, and they’re being both timid and foolish by not trying to get their fair share.
Here’s a question to ask yourself if you’re torn about whether to safely park money you’ll need in the next 12 to 60 months in a high-interest savings account, or invest in something riskier: Would you feel worse if you missed out on the opportunity to make a return better than the 2 per cent to 2.3 per cent that high-interest accounts top out at, or if you lost a chunk of your savings because your investment turned out badly? If they answer honestly, most people will say that losing money would bother them more.
Problem is, our judgment about risk has been clouded by an extended period in which every downturn in stocks has been followed by a rebound. Even the sluggish Canadian stock market has been in good form lately. Up 3 per cent in May, the S&P/TSX Composite Index was among the world’s strongest stock markets. Energy and industrials were leading sectors, which is a sign of bullish sentiment.
Remember the risks if you’re tempted to put short-term savings into the market. When stocks next undergo a correction, expect the losses to come quickly and sharply. Before you wrap your head around what’s happening, you could be down 5… 10… even 20 per cent. Long-term investors can afford to wait for the inevitable rebound. But if you need your money in the near term, you may have to sell at a time when you’re locking in a loss.
The reader who inquired about what to do with the house-sale profits sounds like a solid candidate for a high-interest account. It’s not a waste to stay safe with money you’ll need in the near term.
Rob Carrick