This week a curious thing happened. A bank said that Canadians were hoarding too much cash.
Being chastised for having too much money on the sidelines and not invested is one of those things that raises suspicions about whether the financial talking heads really do have our best interests at heart. After all, hasn’t this been the worst beginning to a market in memory? Aren’t there countless problems across multiple markets right now? Are we not worried about the global economy? Have we not just ended a dismal 2015?
In fairness to CIBC and it’s chief economist, it is understandable why they are concerned about the reported $75 billion sitting on the sidelines. Cash doesn’t grown and historically market timing works out badly for most practicing it. People sell when the market is down and neglect to get back in as it goes up, crystallizing losses and missing out on the gains. Smart investing means riding through the markets, rebalancing and being patient. That’s the Warren Buffet way.
Except people aren’t Warren Buffet. RRSPs and TFSAs and other investment accounts are not here to fulfill the larger ambitions of Berkshire Hathaway. They are here to facilitate people’s retirement, a date the looms much larger for more people than ever before. Just consider that if you were 37 in 1990, you were 48 when the market had its first big drop in the early 2000s. You were 55 in 2008, and today you’d be 63. You’re tolerance for risk has decreased significantly in that time as you hurdle towards the date that you will have earned the last dollar you’ll ever make. Under those circumstances taking money to the sidelines may be as much an act of self preservation as it is investment heresy.
I could end this article here, but what is so interesting about the $75 billion number is who is actually hoarding that money and what it may actually be telling us about Canadian finances, because it’s not what you think.
Above is the cash position compared with the historic trend line dating back to 1992. In keeping with both the aging population and the ongoing volatility in the markets growth in the cash positions is understandable, if not always desirable. But look what happens when we look at who is hoarding cash.
Bizarrely it is people under the age of 35 who have the largest percentage of wealth in cash, close to 35% of their available money. Now, if you are over the age of 45 the average cash position is 15% (roughly) which would account for the vast bulk of the derided $75 billion. But even if the under 35 set have less money, why are they holding onto so much of it?
The answer I suspect is both disheartening and concerning, a blend of uncertain finances, savings for down payments on property and the result of bad financial advice. The first two are well documented, both the challenges of making ends meet and the unfavourable housing market towards first time buyers. But the last issue should make us all perk up our heads, for it represents a failure of the financial community to help young investors get good advice.
How does the millennial generation do things? On their phones mostly. Cue the eye roll from anyone under 30 at this gross simplification, but it holds up. The rise of smart phones as a staple of doing things has provided a veneer of knowledge on numerous issues, while encouraging a culture of DIY so long as there is an app to facilitate it. This shift is so profound that back in 2011 Rogers Media applied to start its own bank (which came to fruition in 2013). Why? Well what else do you do in an age where everyone is looking for the cheapest credit cards and the best loyalty program when you control just over 30% of the wireless market in Canada? If you can pay for things with your phones, why couldn’t you also manage your retirement with your smart phone too?
Young people also don’t have that much money, which has created an indifference from much of the financial community. Rather than cultivate young investors they have been relegated to the sidelines, encouraged to do business with one of the rotating in-store financial advisors, or have been asked at the counter to make a spur of the moment investment decision. Some may have given tried to use the “robot-advisor”, while some will try and do it themselves and many more will do nothing at all.
Profitability drives much of the indifference from the business community, while societally there hasn’t been much for young people to look forward to in the investing world. Far from the heady days of the 1980s and 1990s, the 2000s have been tumultuous and filled with cynicism. The crash of 2008 may have left many investors shaken but it’s also likely put off a number of young people who see no value in it and assume (if the popularity of Bernie Sanders is proof of anything) that the game is rigged against them.
I’m already of the opinion that much of our society is too geared towards helping out the “senior” demographic, but this isn’t a competition between generations. Instead it’s about making sure that we aren’t just looking to satisfying immediate needs but managing to the needs of the future as well. The lessons for a younger generation if they are ignored by financial professionals will not be the ones we want. The help and hands on guidance that has been a cornerstone of sound management for the past thirty years in Canada is not some natural order set in stone. It is the product of outreach and continued effort to develop good habits in both saving and investing. Ignoring a generation will be at our peril and theirs.