High inflation, rising interest rates and the increased cost of living are having an impact on the amount of money Canadians are investing, according to a new survey by personal finance site WealthRocket.
The study, which interviewed 1,200 adults, found that three-in-10 Canadians are investing less due to the economic uncertainty over the last two years. The same number (30 per cent) are also reporting a lower risk tolerance as a result of the COVID-19 pandemic.
What’s more, some Canadians who were investing have since stopped (10 per cent), while others have not started at all (10 per cent) because of the same economic factors.
“Fear tends to override rational thinking,” David O’Leary, CFA charterholder and WealthRocket’s personal finance expert, said in a press release. “So people stop investing, or sell their investments when it feels like there’s uncertainty. And we’re hearing a lot of that.”
The highest drop in investing (36 per cent) was among those between the ages of 35 and 44.
“My guess is that’s the cohort of young families who’ve got a lot of expenses,” O’Leary said. “At this age, your cash flow and net worth tend to drop as you get married, have kids and get a mortgage.”
Hardly nine per cent of Canadians are currently investing more than they were pre-pandemic. But saving for retirement is their top investment goal (55 per cent), regardless of whether they are investing now or planning to in the future. That’s followed by generating income and building wealth (both 43 per cent), purchasing a home and preserving capital (both 24 per cent) and funding for education (15 per cent).
The report notes that buying a home is lower on the list than it might have been pre-pandemic because many Canadians who do not own a home have since given up on ever doing so.
“The cost of buying is just so far out of the ballpark now of what’s reasonable,” O’Leary said. “I would be surprised if there weren’t a meaningful percentage of people who are giving up on saving to buy a home.”
Homeownership costs have weighed on Canadians since the Bank of Canada began aggressively raising interest rates in March 2022. People with variable-rate mortgages have been hit the hardest, with increasing interest rates depleting their cash flow over the last 17 months.
But O’Leary believes the drop in investing has more to do with the state of the economy than Canadians’ wallets.
“On the whole, it probably has a little more to do with economic uncertainty rather than Canadians having no more money to invest,” he said. “Although surely there are those with variable-rate mortgages who have seen all of their extra savings wiped out by higher mortgage payments.”
O’Leary advises against foregoing investing to free up cash or because of lower risk tolerance.
“It’s definitely the wrong thing to do if you don’t need to,” he said. “To the extent that you can keep investing, you should.”
Those who stay on the sidelines will likely miss out on returns, especially if they employ a long-term investment strategy.
“If you’ve got a long-time horizon, just keep going, even if you’re worried that the markets may fall,” O’Leary said. “If they do, it doesn’t usually take all that long for them to rebound.”