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Over 25% of Canadians Are Focusing on Low-Risk Investments Due to Inflation

LARi Insight’s inflation survey revealed a number of ways that Canadians are adjusting their savings or investment strategies in response to inflation. One key theme is a movement to reduce risk in investment portfolios. Of more than 1,200 survey respondents, 24.5% indicated they are “focusing on low-risk investments”, while 15.2% indicated they are “diversifying investments to mitigate risk”. Between May 2020 and December 2023, Canada has seen inflation growth of 16.3%. The financial volatility has been compounded by stock market swings (the S&P 500 bounced back in 2023 after the worst losses of the decade in 2022). The dramatic fall of cryptocurrency dominated last year’s financial headlines, and we’ve previously written about the dramatic fall of NFT values. We’ve been through a lot – and it’s not surprising there’s a flight to lower-risk investments. 

Our survey also looked at Canadians’ confidence in financial products and investments. In times of market volatility and uncertainty, the reputation of the entire financial industry and the products they sell can take a hit in consumer confidence – more on that below.

 

The focus on reduced portfolio risk should not be interpreted purely as a “flight to safety”. Interest rates have surged to the highest levels we’ve seen in more than 20 years. And it happened fast, from 2.45% in March 2022 to 7.20% today. Fixed-income investments are much more compelling than in recent years. 

20.8% of Canadians are Looking for Investment Opportunities

Among our survey respondents, 20.8% are reconsidering their investments to find new opportunities. With interest rates rising, some Canadians are drawn to both the reduced risk (as compared to equity investing) AND the improving returns of fixed-income mutual funds, bonds, or GICs. Investment experts from Vanguard predict that a balanced portfolio of 60% equities and 40% fixed income should deliver 6-7% returns in 2024.

“We’re taking advantage of the higher interest rates of GICs”  – Tom, Calgary, AB.

24.5% of Canadians are Increasing Contributions to Savings

Sideline money, funds held in money market investments, have been growing rapidly since the pandemic, continually reaching new highs. How much? About $6 Trillion. While inflation has soared and interest rates have climbed, many Canadians have been able to squirrel away some cash. And those money market rates look better than ever.

“We’re planning for future mortgage rate increases. So we’re holding more money in cash in the short term due to high-interest savings account rates”  – Paul, Pickering, Ont.

Many Canadians are Focused on Debt Reduction and Paying Down Debt

While our survey question focused on changes to savings or investment strategies due to inflation, the responses touched on other themes covered in our inflation survey. One of those is an increasing focus on debt reduction – this was the highest selected priority when Canadians were asked about inflation’s impact on their long-term financial plans. Many respondents told us that inflation has resulted in increasing household debt and, as a result, they struggle to find any extra funds to save or invest. Others are tackling debt head-on, focusing on paying off loans rather than investing for future growth.

“I have a good interest rate until February 2026 for my mortgage, so I’m spending less eating out and on household products, and I’m putting extra payments on my mortgage.”  – Colton, Mississauga, Ont.

15.1% of Canadians are Adjusting Their Investment Time Horizon 

Growing inflation often can have an impact on long-term financial plans, as Canadians are forced to divert savings for current expenses. With rising household expenses, especially the increases in mortgage interest that many Canadians face, the prospect of retirement must be extended further into their future.

“I’ve had to reduce my contribution to my savings plan for my future/retirement”

 – Ingrid, Holland, MB.

Confidence in financial products and investments

Another of the LARi Insight inflation survey questions asked, “How has inflation affected your confidence in financial products and investments?” It has been a rocky economic environment. Less than a year ago, we witnessed the collapse of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. We’ve seen darling Canadian tech stocks like Shopify lose billions in value, and outright criminal activity from Canadian investment firms like Bridging Finance IncHow is the Canadian faith in financial institutions (and products) holding up?

 

More than half, 51.1%, indicated that our period of rising inflation has “significantly decreased” (19.9%) or “slightly decreased” (31.2%) their confidence in financial products and investments.  Nearly one-third (34.4%) reported no change in confidence. Just 5.1% indicated that their confidence in financial products had slightly increased, while only 1.4% chose “significantly increased my confidence.” Canada is fortunate to have strong banking controls, and CDIC protection, which has held the industry in good stead through some heavy headwinds in recent years.

How Low-Risk Investments can impact long-term growth

Let’s turn to the practical implications for the 24.6% of Canadians who indicated they are focusing on low-risk investments due to inflation. The average return of the S&P 500 over 30 years is close to 10%. GIC rates are hovering somewhere between 4-6% depending on the provider and term. Our investment calculator shows that over 10 years the investment in stocks would increase to $27,070, while the GIC investment would deliver $16,470, a difference of $10,600. Of course, as the professionals warn in every disclaimer, past performance is not indicative of future returns. Sometimes a safe bet is the best choice – that’s for you to decide. 

Learn More About Your Investment Strategy and Options

Our investing pillar contains a wealth of information to help you make the right investment choices, including our RRSP Guide, RESP Guide, TFSA basics. Get hands-on with our calculators to explore investing in an RRSP, RESP, or calculating your 2023 RRSP Contribution Room.

The Financial Impacts of Canadian Inflation

Explore our complete coverage, with original market research and analysis from LARi Insight.

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