Reliance on stocks threatening Canadian household net worth

As debt grows to record levels in Canada, the financial powers-that-be have paradoxically urged Canadians to take control of their finances. We need to do ...

As debt grows to record levels in Canada, the financial powers-that-be have paradoxically urged Canadians to take control of their finances. We need to do a better job of controlling our spending. Pay down our debt. Build up our rainy day funds. Save more for our retirement.

But Canadians have been slow to take that advice to heart. Aside from feeling increasingly comfortable with shouldering more debt, they have been accumulating less cash (see “Vancouverites least prepared for a rainy day” – BIV issue 1212; January 15-21). Canadians are instead betting their financial futures in riskier and more volatile investments like stocks.

An RBC Economics report noted that three-quarters of Canadian household financial assets are now in stocks, insurance products and mutual funds that have a majority of assets in equities – compared with only half in the early 1980s.

Much of this reflects the steady decline of interest rates over the past 30 years. As rates fell, so did returns on traditional fixed-income investments such as government bonds and GICs. To offset these declines, investors have tried to increase investment returns by moving into higher risk assets.

The impact of this move up the risk-return scale was most notable after the 2008 financial crisis. With a greater proportion of retirement nest eggs and household assets in equities, many Canadians have found their net worth fluctuating more wildly than in the past. The report noted that households experienced an average loss of net worth of 10.2% in 2008 following the financial crisis. If investors didn’t sell their stocks then, they likely saw their net worth recover in subsequent years – although not everyone (especially those near retirement) stayed in the market to weather the volatility.

With more household wealth in equities, Canadians will likely be forced to prepare themselves emotionally for a long-term rollercoaster. The report noted that because Canadians have been saving less, they have been relying more on capital gains and home price appreciation to bolster their net worth.

With housing prices expected to remain relatively flat over the next few years in B.C. and continued stock market volatility, households with high debt levels and little cash on hand face an uncertain and potentially bleak fiscal future.

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