Ashleay: Welcome to iA Financial Group's “In Your Interest!” podcast. My name is Ashleay, and today I'm joined by Sébastien Mc Mahon, Chief Strategist and Senior Economist, and Philippe Millette, Assistant Vice President, Canada, Individual Savings and Retirement, Individual Life Sales and Marketing at iA Financial Group. So hello, gentlemen.
Sébastien: Hello, Ashleay and hello, the man with the long title.
Phillippe: Yes. Hi.
Ashleay: Hi. So, thank you for joining me on this episode. We are going to talk a little bit more about inflation and debt. So, these two things affect Canadian savings. Maybe to begin, Sébastien, would you give us an overview of the current situation for savers?
Sébastien: Yeah, sure. So, we've talked about inflation a lot. We've talked about interest rates at length in this podcast over the last year. But, you know, here we're going to focus on how the current environment is peculiar or different from what we've seen in the recent past for savers. So, the majority of the population, you know, when you save, you need now to face interest rates that are higher. So, we went from about 0.25% in March of 2022 to 5% in September 2023. So, when you save at higher interest rates, that's a positive. But it also comes with higher mortgage rates. So, if you have a variable mortgage or if you had to renew recently, you know, that took a bite out of your, maybe, saving power. So that's a big part of the budget that went out. Inflation, you know, the peak in inflation is very likely behind us. We went from 8% plus at some moment in the last year to below 3% this summer. But now we're seeing a rebound because of global oil prices pushing gasoline prices higher. So, the fight is not done yet. Food inflation is still running at about 8% year over year. So, we always look at year over year, month over month. But here, just since August of 2020, the cumulative inflation rate for groceries is 15%. So, you're paying 15% more for the same grocery basket now as you did three years ago. But the average wage in Canada is only up 12%. So, 15% for groceries, 12% for wage increases. So you're losing some buying power there. On the other side, you know, households are saving much less now. The average savings rate over time is about 5, 5.5%. Now we're a little bit below 3%. So we're seeing that households are behaving differently and they need to adjust their savings habits to face the peculiar environment that we're in.
Ashleay: And so in short, everything costs more and savings are starting to be eaten away. So, what should you do with your savings? The last thing you want to do, I guess, is let your money sit in an account. But maybe, Philippe, you could guide us a little bit on that.
Philippe: Yeah, just like you said, Ashleay and Sébastien, that's right. I guess because there is inflation, people's reaction is to spend right now. A lot of people won't invest because there is inflation or they will postpone investing or they will invest in guaranteed investments because the rates are better, the yields are better.
Sébastien: So they're cutting the savings budget.
Philippe: They're cutting the savings budget to spend right now, before everything is too expensive. But you said it, Sébastien. The cost of living is increasing. Okay? And if it's increasing over many years, what does it mean? It means that when you will be retired, the cost of living will be higher. So, what you are saving right now might not be enough. Actually, if we keep an inflation of 3%, which is very low historically - a year ago we had an inflation of 2%, right? So, it's 50% more. You will need to invest a lot more to have the same standard of living once retired. So, people's reaction when there is inflation often is to postpone investing and spend. In fact, what they should do, they should invest even more.
Sébastien: Yeah, inflation. There's nothing you can do on an individual level to fight inflation. It is what it is. But, you know, the only reaction that you can have or should have is to put yourself in a better position to make sure that you don't lose too much of your spending power over time. So investing is key and also in what you invest. You know, this is also a key component here.
Philippe: Yeah, it is. It is important. You're touching on something. And, you know, it reminds me when comes the time to invest, and as I said, as an example right now, some people, a lot of people, are not investing. They're kind of timing the market. They're waiting for the best time to invest that money. But really, what will make you successful over the long term and what will provide you the savings that you need for your retirement is not timing your investments, but it's the time you spend being invested. So, it's important to invest all the time, to remain invested. It's important to be disciplined. Once you realize that, the best way to tackle risk over the long term is really to have a balanced approach, is to have a balanced strategy. I do agree you need guaranteed investments. You need more secure investments. But you must have, to maintain your standard of living over the long term, you must have more aggressive investments. You have to invest in equities. You have to invest in companies. You were talking about food companies and the inflation. Those companies are making a lot of money right now because of inflation, okay? So why don't you invest in those companies, as someone investing for your retirement? Those companies, you will have them in a fund, an equity fund composed of different companies. That's a very good example of companies that you should keep investing in. And if you have a balanced approach and you keep investing in companies over the long term and you don't time your investing, basically what you will see or what you should aim for or expect is an average return of 6% and 6% over the long term is more than 5% right now and 5%, which is over the short term, and if we decrease interest rates, it won't be 5% anymore. It will be lower.
Sébastien: So, when you talk about, you know, guaranteed investments or more stable, often it's money market. The money market, you do get 5% now, but it's about, as you said, it's about the timing. So right now, it was a good idea to be to be there recently, maybe more than before because in the decade before, interest rates were very low. But now is, when will you, if you decide that you're going to be deeply into the money market, when are you going to come out of that? And likely, you know, the typical behaviour and we're all the same, it's human nature, is that when you've seen a year or two or three, that the stock market has been pretty strong, now it's time to go back in. But often, you know, the best years are behind. So, it's always about timing. So, when you say balanced portfolios, you know, you should have some secure and some less secure investments at all times within your assets.
Philippe: Absolutely. So, I want to reiterate, I'm not saying that you shouldn't have guaranteed investments. It's okay to have guaranteed investments. The mistake is to have only that. Or, the mistake is to time - right now investing only in guaranteed investments and later when the stock markets will provide better returns, investing only or mostly in stock markets. But just like you said, when you switch from one market to the other, you always miss the best returns. And I said it - over the long term, the best strategy is to be disciplined and to remain invested and to invest when you have money. That being said, a very simple strategy to not time the market and remain disciplined and not listening to your emotions, basically, is to have what we call a strategy of dollar cost averaging. Basically, what you should do is you should invest, I don't know, over 12 months or maybe 52 weeks. So, you should do what we call periodic investing. So, as I said, it could be 12 months, so it could be monthly, it could be weekly, it could be bi-weekly. That doesn't really matter. But you invest the same amount over and over and over and you remain disciplined. And you always invest. So, when the markets are lower, you will buy cheaper and you will take advantage of the opportunities. And also, when you do that, the dollar cost averaging strategy, you know, it's as if you're forgetting about the money that you are investing and you're investing smaller amounts, so your behaviour won't be the same. It won't be as emotional because the dollar amounts are much smaller. And when you have been doing that for years, you even don't think about it.
Sébastien: Yeah, you're amazed at the results.
Sébastien: And this is a theme we've had a few times here in this podcast to have a plan, get the help of an advisor. It's always a very good practice, invest regularly, and you mentioned that before, but there's lots of studies that show that it's very hard to beat dollar cost averaging over the long run. You need to be very, you know, opportunistic or lucky to beat that over the long run. So why bother with that?
Sébastien: But one topic that we've discussed together in the past was the tax optimization. I don't know if you can tell us a little bit about that.
Philippe: Yeah, well, when we're talking about tax optimization, it seems like a very high-level strategy. But in fact, what we are referring to is just make sure that if you have guaranteed investments or secure investments, that you don't have those investments in a non-registered account, okay? So, try to focus, mainly for those investments, try to have them as much as possible in your RRSP or in your…
Sébastien: Tax free savings account.
Philippe: Tax free savings account, thank you so much. Acronyms! I, I was yeah, I was looking for the acronym, okay, thank you so much. But this is where you should have your guaranteed investments, okay? Because guaranteed investments provide interest returns, okay? That's what they give you. And interest is what is the most taxed, okay? 100% of your return will be taxed. So right now, if you invest in a GIC and your return is 5%, your yield is 5%, that whole 5% is taxable. So, let's say you pay 50% tax. So, you will in fact have 2.5%. But as you said earlier, inflation is around 3, 3.5%. So, in fact, you're losing 1% a year. That's what you're doing. So, keep those investments in your registered accounts and focus on your balanced approach. Focus or keep your equity investments or the more aggressive investments over the long term. Focus on your non-registered accounts, okay? So those placements, investments, I'm sorry, are taxed only at 50%. So, over the long term, you have 50% more to provide your return. So, you have 50% more of your return that keeps providing return. So, the compounding effect over the long term will be much better with equities.
Ashleay: And maybe just to finish off, Philippe, could you tell us a little bit more about dividends?
Philippe: Yes. We were talking about investing in equities and it's a lot more tax efficient. Right now, I would say, when we talk about equities or investing in the stock market, often people believe they will be taking a big risk, a huge risk. In fact, you should, or, as a first step, you could consider dividend-paying companies. So, I was talking about interest earlier. Those companies, they won't pay you interest like a guaranteed investment. Those companies that you will be investing in will be paying you a dividend. And that dividend, first of all, is a lot more tax efficient. So, you have more in your pocket after tax. And also what I like about dividend-paying companies - we're talking about large companies that dominate their sectors, they have a lot of money. They give some of that money back to you. Right now, the average dividend is around 3 to 4%. What does it mean? If inflation is 3% or 3.5% and you're receiving on an annual basis a dividend of 4%, that dividend will offset the inflation and you still have your companies that will provide you capital gains over the long term. So right now, that's something interesting to consider. If you don't want to take too much risk by investing in companies.
Ashleay: Very good. Thank you so much, Philippe. And thank you, Sébastien, as always. Both of you have taught us quite a bit, so we hope you all enjoyed our podcast today and have an excellent week. Love this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast available on all platforms, visit the economic news page on ia.ca or follow us on social media.