Over the past few years, a combination of rising interest rates, increasing inflation and a global pandemic gave investors plenty of reasons to pause on putting their money into the markets. Instead, many parked their savings into the relative safety of a high-interest savings account (HISA). While that may have helped calm nerves and provide a decent return, especially as rates increased, ultimately, those who stayed invested in the markets through the tumultuous times are reaping the rewards.
"In 2020, we had a global pandemic that made many people get out of the market because they thought a major correction was coming," says David Ragan, a Director and Portfolio Manager at Mawer Investment Management. "Instead, we saw high single-digit returns."
In 2023, he continues, "interest rates had just been hiked all around the world and there was fear of an economic slowdown or even a recession. However, equity returns in 2023 were up double digits. You just don't know what's going to happen."
While keeping your money in a HISA may feel like a safe way to generate a return, as interest rates decline and yields on these accounts and funds drop, these solutions will become less attractive to investors. Not only that, but you'll continue to miss out on any potential market gains.
"Given how hard it is to know when to get back into the market, the likelihood of you missing some big upswings is high."
Ten days make a difference
Research has shown that not investing in the market can have a significant long-term impact on your portfolio. An analysis by Counsel Portfolio Services found that if you invested $10,000 in the S&P/TSX Composite Total Return Index over a 10-year period, from December 2013 through December 2023, you'd accumulate $20,842 for a 7.62% rate of return. If you were in and out of the market - maybe moving into cash during volatile periods - and missed out on the 10 best days, your investment would grow to $12,739 for a 2.45% return.
Why such a significant difference? It's because some of the market's 10 best days over that period fell within two weeks of its worst. Given how hard it is to know when to get back into the market, the likelihood of you missing some big upswings is high.
"There's a handful of very positive days that make up a large portion of your return," Ragan notes. "One of the biggest mistakes you can make as an investor is having an emotional reaction — which is often going to cash — at the worst time. You just don't know what the month or the year is going to give you."
"...equities, save for some ups and downs, are doing just fine. The S&P 500, for example, is up around 15% since the start of the year."
More bang for your buck
With the Bank of Canada recently cutting interest rates for the second time this year — and hinting more reductions could be on the way — HISAs are becoming less desirable. Although some of these accounts are still yielding over 4%, it's all relative to how equities are doing. And equities, save for some ups and downs, are doing just fine. The S&P 500, for example, is up around 15% since the start of the year.
"Cash has underperformed equities this year and last," Ragan says. "If it's a down year for the market, that's when cash outperforms because it's the lowest-risk asset. But cash rarely outperforms equities and for that to happen, you have to be right on the timing."
The last time cash outperformed the market was in 2022, when it returned 2% compared to the 18% drop in stocks. Since 1928, cash has outperformed stocks just 31% of the time, with the majority of that outperformance happening over a one-year period.
Setting the stage for a return to the market
When you're ready to move your money back into the market, Ragan says there are two ways to do it. The first is putting a lump sum of cash in the market at all at once, "but that can be scary — particularly you if you pick the wrong moment to do it," he says. "It's the right thing to do in the long-term, but in the short-term, it can be emotionally hard."
The other option is to use dollar-cost averaging. It's an investing approach where you move a smaller amount of money every month from your HISA into a diversified portfolio until all of those funds have been transferred. "That can help minimize regret," he explains.
While the markets may feel uncertain at the moment, with that uncertainty comes opportunity, Ragan says. "It's never a bad time to start making a plan or to think about staging cash-in. No one knows what's going to happen but if your two decision points are being out of the market for the next five years or being in it now, you should be in it now."
Mastering your emotions
The key to making a move in a way that won't be emotionally draining is to take a long-term strategic view of your portfolio and be honest with yourself about what you're feeling.
Acknowledging your emotions and understanding that they aren't necessarily backed up by facts can be the key to moving forward.
Also, trust that equities will remain a better option than cash. "That's all we can bank on," Ragan says. "You know when you invest over the long term — at least based on historical numbers — you're going to win."