“Make your savings grow like never before. That’s the catchy headline of an advertising campaign by a major Canadian bank that is currently offering a promotional interest rate of 5% for its high-interest accounts.
With the generally disappointing portfolio returns in 2022 and the economic uncertainty resulting from the fight against inflation, I can easily imagine that many are wondering if it would not be wiser to temporarily use this type of account. to secure their assets. Especially given the risks of an impending recession. I am not saying here that a recession is imminent. But this question has been asked to me by several people in the last week, and I conclude that these fears are growing for some.
The appeal of this promotion, as with guaranteed investment products today, calls for making some important distinctions.
Save or invest
The advertising referred to here is not misleading. A guaranteed return of 5% effectively allows an acceleration of savings. Saving is the very foundation of healthy personal finances. Thus, a high-interest account is the ideal vehicle for financing your emergency fund and growing your accumulated savings for short-term projects, generally within a twelve-month horizon.
Stock market investment is generally favored for medium-term objectives, such as the financing of special projects (eg: business, chalet) that are in the long term or, of course, in anticipation of retirement. Although it is possible for a stock portfolio to generate a more than attractive return in the short term, this potential return premium comes with an additional risk that is not suitable for all risk tolerance profiles.
Keeping the money invested, the basis of the investment
One of the rules for getting rich on the stock market is not to try to anticipate market fluctuations by leaving and re-entering them. If the 5% interest is guaranteed, it must be remembered that it is only for a period of a few months. So if you sell stocks that are still losing after the 2021-2022 pullback, you will potentially miss the rally.
Also, in the example given, the promotion does not apply to registered accounts. It should also be taken into account that interest income is fully taxable. The paradox is thus amplified by the fact that you should hold investments that generate interest income ideally in your registered accounts, for example your RRSP, TFSA, TFSA, RESP.
For people with a very conservative investor profile, guaranteed products are relevant. Since GICs (guaranteed investment certificates) are still popular, you should first think about the distinction between saving and investing before buying one. Only then can you think about tax optimization of your investment income.
The recession and the stock markets
Regularly, the risks of recession cause a lot of ink to flow, because these periods represent economically difficult phases although all in all quite rare. While it’s natural to wonder how the economy will react in this period of tighter monetary policy, you should stick to your investments for the long term.
In summary, there are two things you need to remember here. The first is that it may very well be that the bottom of the market has not yet been reached, despite the mirage projected by the rise noted at the start of the year. The past tells us that equities peak before the onset of the recession and bottom before the end of it. Therefore, if the risks of recession materialize, the market will present investment opportunities, as the recovery of the markets following recessions has, in the past, been longer than the period of decline.
The second element to remember is that historically certain sectors behave quite well in times of recession. This is the case for the consumer and health sectors. The ideal is therefore to bet on a diversified portfolio, which makes it possible to balance the performance of the different sectors according to the market cycle.
In sum, the declining equity market is a sign that investors believe a recession is upon us. When this actually happens, the markets go up quickly, since the projections of the future become clearer. You won’t want to miss this recovery for your long-term goals, no matter what promotion or guaranteed product you may be dangled.
Financial planner, Sandy Lachapelle is president of the independent firm Lachapelle intelligent finances.