So novel was the 5-per-cent yield, it may have driven Canadian investors a bit loopy.
They plowed billions into money market investments and cash alternatives, they made a superstar of the lowly guaranteed investment certificate, and they wondered why they should invest in risk assets, like stocks, at all.
Cash ruled the investment world in 2023. But it never made much financial sense.
“People got excited by what they thought was a guaranteed 5-per-cent return,” said Benjamin Felix, portfolio manager and head of research at PWL Capital. “But it wasn’t as compelling as they were imagining.”
The problem is that the yields investors were rejoicing were nominal, in that they didn’t factor in the erosive effects of inflation.
Dash for cash
Total assets held in Canadian money market
and cash-alternative ETFs (In billions of dollars)
$29
24
19
14
9
4
2020
2021
2022
2023
the globe and mail, source: national bank
of canada
Dash for cash
Total assets held in Canadian money market
and cash-alternative ETFs (In billions of dollars)
$29
24
19
14
9
4
2020
2021
2022
2023
the globe and mail, source: national bank
of canada
Dash for cash
Total assets held in Canadian money market and cash-alternative ETFs
(In billions of dollars)
$29
24
19
14
9
4
2020
2021
2022
2023
the globe and mail, source: national bank of canada
Five per cent appeared generous by historical standards, after two decades of paltry payoffs for GICs and the like. But after inflation, those yields were minimal, if not negative, for most of the past 18 months.
In 2022, when the GIC craze got started, Canadian inflation averaged 6.8 per cent, as measured by the rise in the consumer price index. That more than wiped out the return to be made on cash.
It was only last March when Canadian inflation retreated below the 5-per-cent mark. For the year up to the end of November, CPI rose by an average of 3.7 per cent annualized. That loss to purchasing power eats up the bulk of your nominal return.
Then you must factor in taxes, since payments on GICs held outside of tax-sheltered accounts are taxed as regular income, unlike dividends or capital gains.
Suddenly, the realized yield on GICs and cash alternatives is reduced to miniscule levels, if not worse.
And yet, investor money cascaded into these instruments with little interruption last year. Not only were investors lured in by headline yields, but the experience with the stock market the prior year likely spooked the masses as well.
In 2022, rampant inflation and the global rate-hike campaign clobbered stocks and bonds globally, dealing frightful losses to diversified portfolios. Going into 2023, economic consensus was quite certain that a recession would land before the end of the year. To many investors, low-risk instruments paying 5 per cent sounded like just the thing.
The money market was the hottest thing in investment funds in 2023, with a record US$1.3-trillion flowing into these perceived safe havens in the United States.
In Canada, high-interest savings ETFs sold by CI and Horizons were the top two funds on the year, together drawing in more than $6-billion in net assets, according to data from National Bank Financial.
These kinds of funds in Canada held roughly $25-billion in assets as of the end of December – a quadrupling over the past two years.
Over the year, a movement built in investing circles around shifting one’s focus to the safety of the money market. With yields at 5 per cent, why bother with stocks? “I got that question a ton last year,” Mr. Felix said.
In the U.S., the term “T-bill and chill” entered the investing lexicon, describing a strategy of weighting one’s portfolio heavily, or entirely, in U.S. Treasuries.
But the math never made sense, for the most part. Sure, individual circumstances may justify parking some money in a GIC or a high-interest savings account. Money for emergencies, for example. Or saving up for a mortgage refinancing on the horizon.
But plenty of long-term money was misdirected into cash alternatives when it would have been much better off in the stock market.
Consider the last year and a half, which was supposedly the greatest stretch for GICs in a generation. While that money struggled to earn a positive real return after tax, the stock market made steady gains.
The S&P/TSX Composite Index is up by 11 per cent over that time. The S&P 500 index is up by 24 per cent. The Nasdaq Composite Index is up by 32 per cent.
In fact, in all interest rate environments, from deeply negative to double digits, expected stock returns are higher than what you can expect from a high-interest savings account, Mr. Felix said, citing research from more than a century of market returns across 23 countries.
Sitting in cash proved to be the wrong move last year. Remaining there would be to double down on the same mistake.