The Risk of Not Investing

 

 

 

 

 

 

 

 

 

 

 

In the years following the financial crisis of 2008, many people have become disenchanted with the markets. They figure there’s simply no money-making magic left. What they were once told could only go up, came down more quickly and more violently than anyone had expected. This resulted in baby boomers delaying their retirement, people of all ages facing higher unemployment rates and many one-time homeowners losing their homes to foreclosure. Definitely a bad time all around.

In this environment, it’s easy to understand the temptation to keep what little money you might have in a savings account — if not hidden in a pickle jar stored in the back of your pantry. These days, the stock market seems more like a roulette wheel than a prudent investment. Or a rickety slot machine, even.

Unfortunately, many people who fear the risk of investing in the stock market don’t consider the other side of the coin: the risk of not investing.

In an era where new graduates and 20-somethings are expected to have half a dozen careers over their lifetime, and where defined benefit pensions are increasingly a thing of the past, you can’t rely on the Canada Pension Plan for retirement. Additionally, with a high cost of living in major Canadian cities, this generation — perhaps more than any before it — will need to become more financially savvy.

The math is quite simple, really: Suppose inflation is at 2-3% (some would argue it’s a good deal higher) and your money is tucked away all safe and cozy-warm in a savings account. Problem is, the savings account pays only 1% interest — so not only are you not making a return on your money, you’re actually watching it flush down the bowl of a very determined and high-powered toilet. Purchasing power is lost every year.

While it’s true that even now the stock market is doing little more than treading water like anĀ apprehensive toddler sporting water wings, the last 100 years have seen an average gain of more than 9% per year (including dividends reinvested in the market). Even if you argue that future trends will not repeat the past, it’s reasonable to assume that long-term returns from the stock market will greatly outweigh interest paid by the banks.

So if you like living dangerously, keep it safe. Store what money you have in either your wallet or local Scotiabank, but nowhere else. However, if you want to get proactive about things, if you’re brave enough to venture into the stock-market arena as a responsible gladiator, as it were, here’s three tips to get started:

  1. Find a low-cost broker. Questrade and Virtual Brokers are two of the cheapest options right now, but all the major banks offer these services, too.
  2. Find an exchange-traded fund (ETF) or index fund that suits your risk tolerance and investment goals. Vanguard, who pioneered low-cost investing in the US, is now available in Canada. iShares, however, remains the largest player in the market.
  3. Buy the ETF or index fund you want, then put it into either a registered retirement savings plan (if your goal is saving for retirement) or a tax-free savings account (if you need more flexibility on when to withdraw). For more information on these products, check out this Government of Canada website, which explains and compares the two.

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Ben Wagler has a BA in English Literature and an MA in Financial Management. He currently lives in Calgary, where he works in the banking industry. He enjoys current events — particularly politics and economics — and periodically writing for his blog, Occasional Ideas.