Should You be Investing or Saving Right Now?

When investors get nervous, they often crave security – and for many, that means moving money out of the market and into cash. This isn’t to say they’re stashing it in a cookie jar or under a mattress, but rather transferring money into accounts or investments that aren’t subject to the ups and downs of the market.

Now, some investors are asking whether it’s the right time to move some of that money back into the market.

“While interest rates are still high, they’re starting to fall,” says Krista Jensen, a Senior Financial Planner with RBC Financial Planning. “It could get harder for clients to keep pace with inflation with cash alone.”

The diversification advantage

There are a few reasons why you may want to make sure at least some of your money is in diversified investments, such as mutual funds, which can hold a variety of securities like stocks and bonds.

“Diversification is helpful because different asset classes move in different directions. So even if one is not doing as well, another investment could be doing better,” Jensen says. 

So, what kinds of investments should be part of your portfolio? Your unique asset mix – the appropriate blend of asset classes – will likely include a combination of cash, fixed income and equities. The makeup of this mix will depend on your personal savings goals and other factors such as time horizon (how long you plan to own the investment) and comfort with volatility (the ups and downs of the market).

• Cash and cash-equivalent investments can provide a base for your portfolio and easy access to cash to tap into on short notice. One potential drawback is that returns may not keep up with inflation.

• Fixed-income investments can generate interest and can provide potential returns to your portfolio.

• Equity investments may be more volatile, however, provide a high potential for long-term growth. 

While those asset classes are important to take into account, there are other ways to diversify within the three. Here are a few other diversification elements to consider:

• Geographic diversity can help you access opportunities outside of Canada and North America, and ensure your assets are not concentrated in any one country.

• Industry or sector diversification can balance the risk of a downturn in a particular sector.

• The concentration of your holdings is important to keep in mind, as a larger, more diverse number of investments with less concentration in any particular holding can reduce your risk exposure.

Diversification is an ideal strategy to help keep your portfolio balanced and help potentially ease the inevitable ups and downs of the market and economy .

Moving money back into the market

One of the reasons investors are eyeing a return to the market is that it has been accepted as one of the best ways to grow long-term assets. If you only hold cash as an investment, you’ll miss out on that market growth. For instance, RBC Global Asset Management has found that since 1973, investors who were not invested on the 10 most profitable trading days in the stock market generated about half of the return over the last 50 years compared with an investor who stayed invested the entire time. In 2023 alone, the S&P 500 returned 24 per cent, while the S&P/TSX Composite Index returned a little more than 8 per cent.

What you don’t want to do is try to time the market – waiting until what you think is the right moment to get back into investing. There’s never a right moment to reinvest, which is why people tend to slowly move money from cash into equities.  One approach, Jensen says, is to use dollar-cost averaging, where you’re automatically moving a set amount of money from your cash accounts into something like a mutual fund. By deploying this strategy of slowly moving money every month, you’ll continue earning on the cash that’s still in your account but start taking advantage of market returns.

Saving versus investing 

When you re-enter the market, what you put your money into will depend on your short-term and long-term goals, risk tolerance levels (how much volatility you can handle) and your time horizon (when you might need the money).

“If you’re saving for retirement, or if you need the money more than five years from now, we always want to look at investing within your risk tolerance to get higher potential rates of return,” Jensen says.

An advisor can talk to you about what investments are best suited for your needs and goals.

“We have a detailed discussion with clients about their comfort with potential volatility and risk and return trade-offs,” Jensen says. “Then we see how much money they need to save to meet their goals and if they’re on track. And then if they’re comfortable with a balanced or conservative portfolio, we move their money all at once or can do it a little bit more gradually.”

Ultimately, she says, shifting savings back into the market is not about finding the perfect time to invest. “It’s making sure you’re taking advantage of time and compounding and letting your money work for you.”

Book an appointment today through MyAdvisor or RBC Online Banking to arrange a personalized conversation with an advisor who can help you clarify and define the right approach for you.

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