How to protect your savings from inflation

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Canadian savers have long been dogged by low interest rates on low-risk investments like guaranteed investment certificates (GICs) and bonds. At least inflation, which erodes the purchasing power of money, used to be low as well.

With the price of anything from food to gasoline soaring in recent months, that’s no longer the case.

Canada’s inflation rate reached 4.7 per cent in October, the highest it’s been since 2003. Meanwhile, the Bank of Canada has yet to raise its trend-setting interest rate.

With investors now caught between the rock of rising inflation and the hard place of still-low interest rates, Global News asked two personal finance pros what, if anything, Canadians can do to protect their savings.

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Here’s what they said.

Click to play video: 'Canada’s inflation rate hits highest level in 18 years'
Canada’s inflation rate hits highest level in 18 years

Continue to keep some savings in cash

If you’re feeling the urge to move some or all of your spare cash into higher-yielding investments to help thwart the impact inflation is having on your finances, resist that impulse, says Bridget Casey, founder of Money After Graduation.

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“I’m a big advocate of having cash on hand,” she says.

Your emergency fund and anything you’re saving for – short-term goals with a time horizon of two years or less – should stay in cash, she adds.

“While you can get greater returns in the stock market, there’s still a lot more volatility and a lot more risk,” she says. “The point of having cash savings is to protect yourself in emergencies and to save for a short-term goal without exposing yourself to that risk and volatility.”

In general, it’s important to put the current bout of inflation into context, says Ben Felix, portfolio manager at PWL Capital.

While the current rate of inflation is higher than what Canadians have become used to over the past several years, it’s still not all that high, he says.

“One of the most important things people can do is not stress about it too much,” he says. “We’re not in a wheelbarrows-full-of-cash type situation, not even close.”

If you’re determined to squeeze a little extra out of your cash savings, you check whether you could get a higher interest rate on your deposits through a savings account offered by a credit union or an online bank, both Casey and Felix say.

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But don’t hold your breath, Casey adds. In the current low-interest environment, even the most competitive high-interest savings account aren’t paying much, she warns.

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For example, according to financial-products comparison site, the highest interest rate currently available to Toronto residents is 1.3 per cent, offered by Canadian tech company Neo Financial. That would still yield a miserly $130 a year of interest on savings of $10,000.

At some of Canada’s big banks, you may still find interest rates as low as 0.01 per cent, which would give you are return of just $1 on a $10,000 deposit over a year.

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Maybe hold off on GICs

While it’s a good idea to keep at least some of your savings in cash, you may want to hold off on locking into a GIC right now, Casey says.

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With a GIC, you lend your financial institution your money for a set number of months or years. Your principal is guaranteed and you’ll usually earn a fixed interest rate on your deposit. However, for some GICs you’ll have to pay a penalty if you withdraw your money before your term is over. And GIC rates aren’t much higher than what you might get with a high-interest savings account.

“At current interest rates right now, I think GICs are probably one of the least attractive investments out there,” Casey says. “If we get a rate raise, you don’t want your money trapped in a GIC, waiting for the term to end and missing out on the increased interest rate,” she adds.

The Bank of Canada said on Oct. 27 it is holding its key interest rate at 0.25 per cent, where it has been since March of 2020. But analysts expect the central bank to start gradually hiking rates starting as soon as the April-to-June quarter of 2022.

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Inflation isn't a good reason to change your asset allocation

If you’re wondering whether you should shuffle your portfolio to take on riskier investments and chase higher returns, take a breath, both Felix and Casey say.

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When averaged out over a very long period of time, the rate of inflation in both Canada and the U.S. is around three per cent, Felix notes. And on both sides of the border, stock returns have significantly outpaced that rate, with bond returns also significantly higher, he says.

“I don’t think people need to start thinking about doing anything special to try and combat (the current rate of inflation),” he says.

Felix is also leery of investing in cryptocurrencies as a way to hedge against inflation.

“Crypto is sold as an inflation hedge because of its decentralized nature, because it’s not tied to fiat money,” he says.

A hedge is an investment whose price movements help offset the impact of whatever an investor is hedging against.

If cryptocurrencies were an inflation hedge, you’d expect their value to increase when inflation rises, Felix says. “But the reality is the crypto is extremely volatile and something that volatile — it’s really tricky to call it a hedge,” he says.

In general, Casey says, inflation isn’t a good reason to change the mix of stocks, bonds and other types of investments in your portfolio.

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“You shouldn’t change your asset allocation necessarily based on what the market is doing, it should reflect your risk tolerance based on who you are as an investor and the age that you are,” she says.

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Take a hard look at your investment fees

Overall, the best thing you might be able to do for your portfolio right now is reduce the investing fees you’re paying, both Felix and Casey say.

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Reducing your fees is a “guaranteed savings,” Felix says.

“Cutting fees is one of the best ways to increase your expected returns,” he adds.

Fees are what you pay the financial service providers that enable you to invest in the financial markets — and they can vary significantly. The fees reduce the net return your receive from your investments.

Those fees, typically expressed as a percentage of your total investment balance, can range from more than three per cent per year for some mutual funds to less than 0.25 per cent for some exchange-traded funds (ETFs).

A difference in fees of a full percentage point or even half of a percentage point can have a very significant effect on your investment returns over the long term, Casey says.

“I usually tell people you should not be paying any more than one per cent on a mutual fund,” she says. “Choosing a low-fee robo advisor or your own portfolio of ETFs is definitely a better choice.”

That said, don’t obsess over fees, she adds.

“Once you’re choosing your own ETFs and you’re comparing one that’s 0.22 per cent to one that’s 0.2 per cent, then you’re probably worrying about fees more than you need to.”


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