3-in-10 Canadians investing less due to economic uncertainty, yet retirement savings is top goal for majority: survey

If you’ve been living in Canada during the last two to three years, you know that things have been economically bumpy, to say the least. First, a global pandemic. Then, surging home prices, followed by rapidly rising interest rates and runaway inflation.

We’ve seen how this instability is impacting the way Canadians shop for food, whether or not they’ll ever be able to afford a home, and their ability to save money. But how has it changed their attitudes and behaviours toward investing?

According to a new WealthRocket survey of 1,200 Canadians ages 18 and older, 30% say they’re investing less due to the economic uncertainty over the last two years. And while retirement savings remains a top investing goal for more than half of Canadians (whether current or future investors), 30% say they now also have a lower risk tolerance as a result of the pandemic.

While lockdowns and COVID-19 protocols are a thing of the past, the Canadian economy has yet to resemble pre-pandemic benchmarks across all sectors. And this is having an impact on the amount of money Canadians are investing.

In fact, 30% of Canadians are investing less money because of inflation, higher living costs, and rising interest rates over the last two years. Meanwhile, 10% were investing but have since stopped, and another 10% haven’t started investing at all for the same reasons.

Of those who are investing less, this number was highest (36%) 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,” says David O’Leary, CFA charterholder and WealthRocket’s personal finance expert. “At this age, your cash flow and net worth tend to drop as you get married, have kids, and get a mortgage.”

Homeownership costs, in particular, weigh heavier now on Canadians’ budgets given the last 17 months of interest rate activity. Variable interest rates have increased significantly, which is eating up cash flow for those with variable-rate mortgages. And all Canadians have also had to contend with higher costs for just about everything from food to gas to rent.

Despite these realities, nearly a quarter of Canadians (23%) say they’re investing the same amount as they were pre-pandemic, while only 9% say they’re investing more. 

But compared to those who are investing less, nearly the same number (30%) say they have a lower investment risk tolerance now as a result of the pandemic. 

This could be for a number of reasons. “On the whole, it probably has a little more to do with economic uncertainty rather than Canadians having no more money to invest,” says O’Leary. “Although surely there are those with variable-rate mortgages who have seen all of their extra savings wiped out by higher mortgage payments.”

According to a 2021 survey conducted by Ipsos for the Ontario Securities Commission, two-in-10 Canadian investors sold at least some of their investments during the pandemic, with the top two reasons being needing extra cash (29%) and wanting to minimize losses (21%).

These rationales likely still hold true today, as the cost of living remains top of mind for Canadians in 2023. But stalling your investment progress in the interest of freeing up cash and lowering risk should be a last resort. “To the extent that you can keep investing, you should,” says O’Leary. “If you’ve got a long time horizon, just keep going. Even if you’re worried that the markets may fall. If they do, it doesn’t usually take all that long for them to rebound.”

“Fear tends to override rational thinking,” he adds. “So people stop investing, or sell their investments when it feels like there’s uncertainty. And we’re hearing a lot of that. It’s definitely the wrong thing to do if you don’t need to.” 

For those who are apprehensive about investing right now, there are several high-interest savings accounts that may provide some added value without the risk of entering the market. Tangerine, for instance, currently offers a promotional 6% savings rate for five months; KOHO offers up to 4.5% for three of its four plan tiers; Wealthsimple Cash offers 4%, and EQ Bank offers 3% when you set up direct deposits or pre-authorized debits.

But for Canadians with specific investment goals, like saving for retirement or building wealth, it’s best to stay the course if you don’t need immediate access to the funds.

According to the survey results, saving for retirement is the number one investment goal (55%) for Canadians, whether they’re investing now or plan to in the future. Generating income (43%) and building wealth (43%) follow equally, as do capital preservation (24%) and purchasing a home (24%), while 12% have no investing goals.

When faced with the ups and downs of the stock market and an unpredictable post-pandemic economy, it’s difficult to know what to invest in or what your goals should be. This appears to be reflected in the survey responses from younger Canadians, whose investment goals are more varied.

The top three goals for those 18-24 are generating income (52%), building wealth (51%), and purchasing a home (44%). Those 25-34 have the same top two goals of generating income (55%) and building wealth (54%), but favour retirement savings (53%) over a home (46%). In contrast, those 35-54, and those older than 54 cite retirement savings as their top goal, with responses above 60%.

For Canadians as a whole, purchasing a home (24%) is lower on the list than it might have been, say, two years ago. It’s currently only the third-most popular goal, tied with capital preservation.

“The cost of buying is just so far out of the ballpark now of what’s reasonable,” says O’Leary. “A significant percentage of those 35 and up might already have a home. But, anecdotally, I would be surprised if there weren’t a meaningful percentage of people who are giving up on saving to buy a home.”

As it turns out, 63% of Canadians who don’t own a home feel like they never will and have given up on ever owning one. And by the end of last year, the number of Canadians who feel they’ll never buy a primary residence increased to 35% from 27% at the end of 2021.

While homeownership may not be a top investment goal for Canadians, most financial goals can be expedited with good investments. But a lot of that success may depend on how and where you invest.

Of the Canadians surveyed, 23% primarily make self-directed investments, where they place their own trades. By contrast, 20% of Canadians say they primarily make fully managed investments, where a professional places trades for them. And 22% prefer a combination of these two approaches.

Another 12% say that they don’t currently invest but if/when they start, they will opt for self-directed; 8% will opt for fully managed; and 15% will use a hybrid of both methods.

“With such strong returns in the markets for so many years and new trading apps like Wealthsimple Trade, ordinary Canadians are feeling much more comfortable trading on their own,” says O’Leary. “If the markets continue to be choppy for much longer, it will be interesting to see if this number falls going forward.”

Younger Canadians in particular prefer to combine self-directed and managed investment styles. For example, 24% of those 18-24 say they prefer a hybrid approach, and 19% self-direct their investments as opposed to having them managed (12%). Similarly, 26% of those 25-34 have both managed and self-directed investments and another 26% only invest independently, while 15% exclusively have managed investments.

In comparison, those 45-54 and over 54 prefer fully managed (20% and 30%, respectively) over self-directed investments (19% and 21%, respectively).

But how much trust should the average Canadian put in themself when it comes to self-directed investing?

“To the extent that people are going to invest in their own education and do some trading to take control of their money, great,” says O’Leary. “But I wouldn’t do that with all of your money. A hybrid or fully managed approach makes the most sense, unless you’ve thoroughly educated yourself in this space.”

Fully managed investments have been made more convenient over the last decade by the rise of Canadian robo-advisor options through companies like Wealthsimple, Questrade, and CI Direct Investing.

Having an automated, online tool to help investors reach their financial goals makes it a lot easier to invest wisely without setting foot in a bank. While it may cost more to have an in-person advisor, there can be fees associated with fully managed investments either way.

Aside from how Canadians are managing their investments, here’s a snapshot of their investment holdings:

• Mutual funds (36%)
• None (31%)
• Stocks (29%)
• GICs (26%)
• Exchange Traded Funds (ETFs) (13%)
• Cryptocurrency (12%)
• Bonds (11%)
• Real estate (11%)
• Other (5%)

More than half of Canadians (56%) have their investments in a Tax-Free Savings Account (TFSA), while 44% invest within a Registered Retirement Savings Plan (RRSP). Only 15% invest within a Registered Education Savings Plan (RESP), 11% in a Locked In Retirement Account (LIRA), and 7% in a First Home Savings Account (FHSA).

According to the survey, 50% of those ages 18-24 say investing according to their values, (e.g. socially responsible investing) is very important, compared with older age groups. Fewer of those 25-34 (45%), 35-44 (40%), 45-54 (33%) and 54 and above (34%) feel the same way. 

Sustainable investing is referred to as environmental, social, and governance (ESG) investing, or social responsible investing (SRI). The former takes things into account like a company’s carbon footprint and labour practices, while the latter focuses on the moral nature of the product a company produces.

While more younger Canadians believe that values-based investing is very important, all generations surveyed say it’s more important than not.

“For many decades we’ve seen an increasing environmental footprint from big business and now climate scientists are saying there’s a real problem here,” says O’Leary. “Younger Canadians have become socially conscious at an earlier age. So it’s not surprising that a larger percentage of younger people feel sustainable investing is very important.”

Investors who are concerned about whether they’re investing sustainably may need to do some initial digging. If you’re investing through an advisor, for example, it’s best to ask them outright before making any moves.

“Most advisors don’t think about it,” says O’Leary. “The simplest steps you can take are to ask your advisor or look at the name of the ETF or mutual fund. It will typically say something like ‘ESG’, ‘sustainable,’ ‘climate friendly,’ or something to that effect.”

There are also agencies that provide sustainability ratings for investments. Morningstar, for instance, rates stocks, ETFs, and mutual funds on how sustainable they are. A company can be rated on a number of factors, from what steps it’s taking to reduce its carbon footprint to what policies it puts in place to promote diversity, equity, and inclusion. However, many Canadians are skeptical about sustainability claims. A recent study shows 60% of Canadians have concerns about the true impact of so-called sustainable investments.

While it may be hard to decipher how well a company is actually doing with meeting their environmental objectives, investors, both new and seasoned, can take it upon themselves to bear part of the responsibility of vetting the companies and funds they invest in.

“There’s much more of an awareness now of how the companies we buy our products and services from have an impact on the world around us in a way that in previous generations, we just weren’t thinking about,” says O’Leary. “Times have changed. So, you have to change your mindset, too, when it comes to investing.”