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Hoarding cash? There are options to make better use of your money

If you're too scared to invest in the stock market, pay down your debt.

Or, invest in your education or qualifications. Or, start a business. Canadians are clinging to cash these days, which means they're wasting opportunities to make better use of their money.

The stock markets are scary for sure right now. The Canadian market is only marginally ahead of where it was 10 years ago, and it's thousands of points below its 2008 peak. Cash in the form of various types of savings accounts and money market mutual funds is a safe alternative. It's also the least efficient use of your money short of sticking it in a drawer (let's retire the mattress cliché, okay?).

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The vast majority of people holding cash are earning less than the inflation rate, which was 1.6 per cent in December. For the money you're using as an emergency fund or saving for short-term goals such as buying a house or a vacation, that's acceptable in exchange for zero risk. But it's not a good enough return for money you'd otherwise be investing for long-term wealth building.

A recent CIBC World Markets report estimated there's a record $75-billion in excess cash, or money that would otherwise have been invested. The report includes the usual scolding – people holding cash are going to miss out when the stock market turns around. They will. It's a fact. The worse Canadian stocks get, the more tempting they are for people investing with a time horizon of 10-plus years.

But the fact that there's $75-billion in excess cash right now suggests investors aren't buying the conventional investing wisdom. That's understandable, because the investing industry can be so full of it. In good times, they quote Warren Buffett's comment about being greedy when others are fearful, or Sir John Templeton's remark about buying when others are despondently selling. But when the market falls, they find excuses not to buy. Don't catch a falling knife, they say. Or, it's not the time to buy because we haven't seen market capitulation.

This discrepancy results from the fact that a lot of investment-industry people are worried about their short-term results, whereas Mr. Buffett and Mr. Templeton took a long-term view. What about those lousy 10-year TSX numbers? Add in dividends to get a total return and you end up with 10-year annualized gains of 4.4 per cent. Not impressive, but far from catastrophic.

My wife and I have a small block of savings that we're putting into the market right now. On a long-term basis, it seems the best use of that money. Disagree? Then choose something else productive to do with your money instead of letting it idle in a savings account.

Paying down debt is a good thought because you're guaranteed to get results, unlike an investment in stocks. At roughly 20 per cent, credit-card debt is begging to be put out of its misery. You might also knock down that line-of-credit balance you've been carrying for years, or make a lump-sum payment on your mortgage.

Interest rates on mortgages and lines of credit are lower than the rate of return you should expect long term from stocks. Never mind that if you're allergic to stocks. Paying down debts is a better use of your money than keeping it in cash.

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Another way to put your excess cash to work is to improve your education. A master's degree or college certificate that builds your long-term earning power is an investment more than an expense. If you've been thinking of starting a business, full-time or as what personal finance bloggers call a "side hustle," then you have still another productive use for your excess cash.

The worst thing you can do with your cash is let it sit around while you wait for inspiration. Here's what's going to happen if you do that. The stock markets will rebound and pile on big gains in a short period. Feeling regretful, you'll jump in late to the market. When the next down cycle happens for stocks, you'll once again feel like you didn't get your fair share of gains and start piling up money in cash.

Break the cycle. Buy stocks, or find something else useful to do with your extra cash. The way the economy's going, a decent return from savings accounts is a long way off.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More


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