Canadians are idiots when it comes to saving and investing

[Argus]

Very little about this article surprised me. I've been aware for some time of the profound ignorance Canadians hold on this topic, despite the importance of saving for their own retirement. One thing which did startle me was that two thirds of Canadians have all their savings and investments in cash. That is a recipe for disaster when they get old, for their money never grows. In fact, it shrinks, as inflation eats away at it year after year.

I embraced the TFSA the year it came out. That was six years ago. At a maximum contribution rate of $5000 a year (changed to $5,500 last two years) I could have put $31,000 into my TFSA. Right now, there is $58,000 worth of stocks in my TFSA. That's what being in the stock market the last few years could have done for anyone -- other than, perhaps, those deluded fools who still buy mutual funds.

Even mutual funds, though, are better than cash. But it seems Canadians are so anxious about their money they want to keep it close at hand, not even in bonds or GICs, much less the stock market. I wonder if that's a product of our nature or symptomatic of the apallingly overpriced and unethical state of investment advisors in Canada.

http://www.theglobeandmail.com/globe-investor/investment-ideas/getting-passed-the-point-of-low-returns/article21412830/

[cybercoma]

Most Canadians don't have enough financial security to invest and save. That's the truth. The median household income is only $75,000 per year. Median personal income is around $32,000 (source).

Putting food on the table, paying rent, having transportation, keeping the phone and lights on....this is where Canadians put their money. Savings and investments are a fantasy for most people.

[Bryan]

Most Canadians don't have enough financial security to invest and save. That's the truth. The median household income is only $75,000 per year. Median personal income is around $32,000 (source).

$75K/yr is still a lot of money if people lived within their means. They don't. People spend what they have, no matter how much it is, THEN wonder why they live paycheque to paycheque.

[Bonam]

People are still spooked from the 2008 crash. What most people don't seem to realize though is that 2009-2014 has been one of the biggest bull markets in history. The typical member of the population will keep going through the same losing cycle: get spooked by a crash and get out of the market when it's low, a few years later after it's been rising and rising, buy in on the hype, just in time for the next crash; rinse and repeat. That's what people do, always buying high and selling low, losing money. And it's their losses that let those of us with a bit more discipline make good money trading

Most people would benefit greatly from just buying what they can every month of an ETF that tracks a broad market index like the S&P500 and never checking their account until the day they retire.

As for cybercoma's point... it is irrelevant rhetoric. The article clearly talks about those investments / savings that do exist and their excessive allocation to cash.

All that being said, in regards to the OP... Argus misinterpreted the article. It does not say 2/3 of Canadians hold all their investments in cash. It says 2/3 of Canadian investments are cash. Substantial difference there.

[Argus]

$75K/yr is still a lot of money if people lived within their means. They don't. People spend what they have, no matter how much it is, THEN wonder why they live paycheque to paycheque.

I agree with this. I once worked with a guy who was a CR-03, making about $35k. He had three kids at home along with a stay-at-home wife. How did he survive? Fairly well, as it turns out. What he didn't have were cells phones, multiple televisions, a car, multiple computers, video games or cable TV. His wife made food, rather than buying much more expensive frozen and packaged food, and they bought in bulk and at sales.

[bush_cheney2004]

....All that being said, in regards to the OP... Argus misinterpreted the article. It does not say 2/3 of Canadians hold all their investments in cash. It says 2/3 of Canadian investments are cash. Substantial difference there.

This is an important distinction as cash/liquidity is an important part of a healthy and diversified portfolio, if only to be in a position to take advantage of buying opportunities. Older savers/investors nearing retirement will usually favor less risky investments to preserve principal, even if it means losing ground to inflation. There are also tax implications for large income earners who cannot defer more income.

Cash can easily represent 20 to 40 percent of a nest egg depending on expense and savings habits because it just "piles up" in the bank.

[Shady]

It's a failure of our education system. There should be mandatory classes in high school involving basic life type stuff. Opening a bank account. Balancing a chequing account, applying for loans, applying for an apartment of mortgage. Budgeting monthly expenses, and saving for the short, medium and long term. Those seem to be skills the vast majority of Canadians need help with. It should be taught and driven into people at a younger age.

[Topaz]

Very little about this article surprised me. I've been aware for some time of the profound ignorance Canadians hold on this topic, despite the importance of saving for their own retirement. One thing which did startle me was that two thirds of Canadians have all their savings and investments in cash. That is a recipe for disaster when they get old, for their money never grows. In fact, it shrinks, as inflation eats away at it year after year.

I embraced the TFSA the year it came out. That was six years ago. At a maximum contribution rate of $5000 a year (changed to $5,500 last two years) I could have put $31,000 into my TFSA. Right now, there is $58,000 worth of stocks in my TFSA. That's what being in the stock market the last few years could have done for anyone -- other than, perhaps, those deluded fools who still buy mutual funds.

Even mutual funds, though, are better than cash. But it seems Canadians are so anxious about their money they want to keep it close at hand, not even in bonds or GICs, much less the stock market. I wonder if that's a product of our nature or symptomatic of the apallingly overpriced and unethical state of investment advisors in Canada.

http://www.theglobeandmail.com/globe-investor/investment-ideas/getting-passed-the-point-of-low-returns/article21412830/

Question, when you die,how much tax will the government get from your estate or can you transfer to spouse as far as the TFSA??

[Argus]

Cash can easily represent 20 to 40 percent of a nest egg depending on expense and savings habits because it just "piles up" in the bank.

If you're stupid.

[TimG]

If you're stupid.

Hardly. The return on AAA bonds is not much better than a GIC but you have to pay transaction costs and assume risks. If you are using asset allocation as your investment strategy it makes sense to have the portion that would normally go into bonds in GIC ladders.

[WWWTT]

Even mutual funds, though, are better than cash. But it seems Canadians are so anxious about their money they want to keep it close at hand, not even in bonds or GICs, much less the stock market. I wonder if that's a product of our nature or symptomatic of the apallingly overpriced and unethical state of investment advisors in Canada.

http://www.theglobeandmail.com/globe-investor/investment-ideas/getting-passed-the-point-of-low-returns/article21412830/

What a load of garbage!

Keep sucking it up and feeding your dependency on something that will never materialize, or better yet, crumble before you even retire!

You really believe in pyramid schemes?

Good luck and stay hooked on the crumbs the stock market feeds you!

WWWTT

[kimmy]

Argus is obviously discussing stupid financial management habits, not attempting to attack individuals or identifiable groups.

Getting upset over this strikes me as extremely thin-skinned. What's next, are we going to get offended when somebody says that the anti-vaxxers are stupid? Moon-landing hoaxers are stupid? Chem-trail kooks and Sandy Hook Truthers and Obama Birthers and 9/11 Truthers? No way! We need to be free to point out that stupid ideas are stupid. Argus contends that holding large sums of cash rather than investing it is a stupid way to manage your finances, and he's made an argument to that effect. People who disagree ought to produce a counter-argument, not wring their hands over the perceived insult of people with poor money management skills.

As to the subject at hand... I'm not into a TFSA yet. Is it worthwhile for somebody who doesn't have a lot of money available for investment or savings? I maintain a bank balance sufficient to last me a few months if I can't work, or to pay emergency expenses. My main financial planning tool has been RRSPs, so that I can increase my tax return. Beyond that, most of my money goes into making extra payments on my mortgage. My thinking has been that once I have my mortgage paid off, my monthly expenses drop dramatically and I will have a lot more freedom to invest, save, and/or work less.

Am I being short-sighted in wanting to get rid of the mortgage first?

-k

[bush_cheney2004]

....Am I being short-sighted in wanting to get rid of the mortgage first?

Not at all....paying down the mortgage is a guaranteed rate of return compared to the higher risk and potential rewards of other investments. If you already have a mortgage, this implies that the value proposition vs. renting has already been made. Further to your point, not having a mortgage to pay each month reduces stress and enables more opportunities for work and leisure options. Do what makes you feel comfortable and sleep better at night.

[ReeferMadness]

Not at all....paying down the mortgage is a guaranteed rate of return compared to the higher risk and potential rewards of other investments. If you already have a mortgage, this implies that the value proposition vs. renting has already been made. Further to your point, not having a mortgage to pay each month reduces stress and enables more opportunities for work and leisure options. Do what makes you feel comfortable and sleep better at night.

Depends on what you're paying on your mortgage and whether or not your income would be taxable. Right now, mortgage rates are very low. It might make more sense to put the money in investments. The trouble is investments can go down as well as up. What's your risk tolerance?

[bush_cheney2004]

Depends on what you're paying on your mortgage and whether or not your income would be taxable. Right now, mortgage rates are very low. It might make more sense to put the money in investments. The trouble is investments can go down as well as up. What's your risk tolerance?

It might make more sense if maximizing investment returns is more important compared to other objectives and choices. Risk, in and of itself, provides little satisfaction unless one needs a gambling fix...may as well go to the casino. There are many ways to get a better return than paying off the mortgage, but most of them involve a lot more work/risk.

[WWWTT]

Depends on what you're paying on your mortgage and whether or not your income would be taxable. Right now, mortgage rates are very low. It might make more sense to put the money in investments. The trouble is investments can go down as well as up. What's your risk tolerance?

It might make more sense if maximizing investment returns is more important compared to other objectives and choices. Risk, in and of itself, provides little satisfaction unless one needs a gambling fix...may as well go to the casino. There are many ways to get a better return than paying off the mortgage, but most of them involve a lot more work/risk

WWWTT

Edited November 9, 2014 by WWWTT

[Argus]

Hardly. The return on AAA bonds is not much better than a GIC but you have to pay transaction costs and assume risks. If you are using asset allocation as your investment strategy it makes sense to have the portion that would normally go into bonds in GIC ladders.

GIC ladders are not cash.

[kimmy]

Not at all....paying down the mortgage is a guaranteed rate of return compared to the higher risk and potential rewards of other investments. If you already have a mortgage, this implies that the value proposition vs. renting has already been made. Further to your point, not having a mortgage to pay each month reduces stress and enables more opportunities for work and leisure options. Do what makes you feel comfortable and sleep better at night.

...

Depends on what you're paying on your mortgage and whether or not your income would be taxable. Right now, mortgage rates are very low. It might make more sense to put the money in investments. The trouble is investments can go down as well as up. What's your risk tolerance?

These two posts pretty much sum up the argument I have with myself over this. On the one hand, I recognize that making extra payments on my low-interest rate mortgage is not optimum in terms of return. On the other hand, the security of having the mortgage paid off really appeals to me.

One factor is, I think that the comparison to make is not value of investments I could make right now vs mortgage interest I pay right now. The relevant comparison is the mortgage interest rates I would be paying in the time-frame when my extra payments are shortening the mortgage. I will have to renew my mortgage probably at least twice before it's paid off, and chances are pretty good that the interest rate will be higher by then.

Another factor is that I just don't know anything about investment. I would end up either putting my money into something low-risk and low-return, or spending money on management fees, which would eat into the pretty thin margin that investment would have over paying off the mortgage.

So those things both kind of tip it towards just doing the safe thing.

Many of these can have financial rewards, but even better, non tangible rewards that are much more valuable and non dependent on someone whom you will never meet!!!

All that stuff is good, but I won't be able to eat non-tangible rewards when I'm old. Looking after your emotional and spiritual needs is important, but making sure your physical needs are looked after is important as well.

-k

[Argus]

As to the subject at hand... I'm not into a TFSA yet. Is it worthwhile for somebody who doesn't have a lot of money available for investment or savings? I maintain a bank balance sufficient to last me a few months if I can't work, or to pay emergency expenses. My main financial planning tool has been RRSPs, so that I can increase my tax return. Beyond that, most of my money goes into making extra payments on my mortgage. My thinking has been that once I have my mortgage paid off, my monthly expenses drop dramatically and I will have a lot more freedom to invest, save, and/or work less.

Am I being short-sighted in wanting to get rid of the mortgage first?

-k

No one can really say without knowing more about you, your age, your income, and how secure that income is.

Putting money into an RRSP will lower your taxable earnings, assuming you have taxable earnings, but that money is then locked up. If you try to access it, the amount you take out will be added to your income for that year, so you'll probably go up a tax bracket if you take out a lot.

That can be a help, mind you, in encouraging people to leave their money alone in an RRSP.

I too put extra payments into my mortgage, just because I felt better having less debt. This year I decided not to do that simply because the amount left on the mortgage is fairly small anyway (for me). It's no longer a big menacing debt, in other words. I am paying under 4% on that loan while my investment earnings so far this year on the stock market are about 14%. So it just made sense to keep the money in those investments. That's the same reason I don't pay off my car loan.

A few months income in a float won't earn you much interest at a bank, so it's not really worth the time to shelter it in a TFSA.

BUT, unless you have a pretty high income, or your partner does (who you've never spoken about) it will be decades before you pay off that mortgage. The time to start saving is not when you're forty five or fifty. Investments are like mortgages in reverse. You know how at first you're making little progress, paying a ton of interest compared to the balance? It's the same with investments. At first you make very little money. It's only as the years add up that your earnings begin to snowball. Just don't let yourself get suckered into the high fee mutual fund game or a lot of that snow will wind up in someone elses pocket.

Edited November 9, 2014 by Argus

[Argus]

Another factor is that I just don't know anything about investment. I would end up either putting my money into something low-risk and low-return, or spending money on management fees, which would eat into the pretty thin margin that investment would have over paying off the mortgage.

This. I've heard this from so many people. And perhaps I shouldn't have said Canadians are idiots about invsments so much as ignorant(as in lacking knowledge). I've had the time to look into it, to read books and untold articles, and to watch and listen to the experts. I also subscribe to an investment advice service.

For most Canadians who don't have the time and expertise, I would agree with Warren Buffet, perhaps the world's greatest, most succesful living investor, who said ordinary people should not buy stocks but buy ETFs instead. An ETF is an Exchange Traded Fund. It's a collection of stocks like a mutual fund, but it's not selected by any criteria other than whatever is in the index, so it's way cheaper, often a quarter, or even a tenth what a mutual fund will charge you.

I do own some ETFs. There are ETFs which strictly track what the major indexes do, as in the TSX, S&P or DOW, and ETFs which will track a particular collection of stocks, like internet stocks, transportation stocks, health care stocks, bank stocks, etc. etc. So you buy one and you get a small piece of fifty or a hundred stocks. I own a biotech ETF, for example, because biotech companies are incredibly volatile and unpredictable individually. Any one can go up or down ridiculous amounts in a day, particlarly if some experimental drug fails or succeeds. Owning the whole sector calms that volatility somewhat. Of course, if the whole sector goes down, like the oil sector has recently, your money still goes down (at least in the short term). I don't own a bank ETF but they tend to be a lot more predictable. You can find lists of Canadian and American ETFs all over the internet. Some banks have their own, as well. I know BMO has a few good ones.

[bush_cheney2004]

....So those things both kind of tip it towards just doing the safe thing.

Absolutely....I used to ride the bleeding edge of investing many years ago when I was young and could afford to take higher risk. Made and lost lots of money in the stock market, and even invested a large sum of money in a laser tooling company that ended up as a sad tax deduction (loss). It is a lot more work to squeeze out the extra dollars that comes with higher risk, but I don't need or want the extra dollars anymore. Mortgage is paid....cash keeps rolling in and piling up because all legal pre-tax options are maxed out.

Some people hate her advice, but nowadays I like Suze Orman's approach to investing that warns people to take care of the basics first and stop trying to hit the home run. Maybe there is a Canadian analog.

[Argus]

Absolutely....I used to ride the bleeding edge of investing many years ago when I was young and could afford to take higher risk.

There's higher risk and then just risk. The two are not synonymous. Investing in a Canadian bank ETF is pretty darn low risk as far as I'm concerned. Certainly it's riskier than a GIC or bonds, but you have to take SOME risk if you want to make money. In fact, if you're keeping your money in for the long term it's hard to say investing money in any Canadian blue chip, IE, banks, telcos, pipelines, is very risky at all. Enbridge, for example, has averaged about 14% per year for the last ten years. And that ten year period includes that mess in 2008/2009. All the pipelines are comfortably in the green over a ten year period, as are all the telcos and all the banks. All of them have done far better than any bank account, or even bonds would have produced.

[bush_cheney2004]

.... All of them have done far better than any bank account, or even bonds would have produced.

I sure hope so, because if not, that approach would suck even more. Preservation of capital is more important to some people than growth. It doesn't make them "ignorant"...just intolerant of risk and/or pursuing other short and long term objectives. Sure, I was able to time the market in 2008 and ride the wave, but so what...other people wanted no part of it. Doesn't make them "idiots".

As for low and high risk, I will issue the same challenge as before. Take equity out of your home and really roll the dice on individual equities...don't be so "conservative" by playing it "safe" with ETFs.

Edited November 9, 2014 by bush_cheney2004

[Michael Hardner]

This. I've heard this from so many people. And perhaps I shouldn't have said Canadians are idiots about invsments so much as ignorant(as in lacking knowledge).

Thank you.

The comment has sparked responses from people who think that your statement needs moderating, sending messages asking whether people are getting warnings.

Let's understand the context of that statement and move forward, thanks.

[Argus]

Thank you.

The comment has sparked responses from people who think that your statement needs moderating, sending messages asking whether people are getting warnings.

Let's understand the context of that statement and move forward, thanks.

At the same time, if you have a lot of money invested and don't really understand much about what it's in, or what you're being charged, or the risks involved, then you damn well OUGHT to educate yourself on it. Being able to read a company's financial statements is likely beyond most investors. But there's really no excuse for not understanding the basics and doing your homework when a lot of your money is involved. If you're not doing that then idiot is probably a reasonable term.