Best investment for 2014?
Canadians preparing their 2014 financial plans have a dilemma. The country's household savings rate was 5.4 per cent in the third quarter of 2013 according to Statistics Canada. If that pace remains constant, a median family, which should generate about $76,000 in income next year, will save $4,404. But where should they put that money?
Canadians traditionally invest in three main assets classes: housing, stocks and bonds. However all of these categories have issues.
With interest rates inordinately low right now, bonds look like a waste of time. Ten-year treasury issues yielded just 2.79 per cent at yearend. Three-month paper paid out less than 1 per cent. While there is little risk involved, those long-term returns barely enable investors to keep ahead of inflation. Those who buy short issues actually lose buying power.
Stocks faring well
Stocks have been doing much better. The benchmark S&P/TSX index rose by a solid 9.55 per cent last year, even more when dividends are included. The US S&P500 did even better, rising by 29.6 per cent during 2013. And that's before dividends and the foreign exchange gains that Canadian investors would have raked in on their U.S. holdings, due to the rising greenback.
In fact stocks have registered exceptional performances on both sides of the border during the five years since the 2008 financial crisis. The trouble is that most of the easy money has by now been raked in by the professionals. Only recently have average investors begun selling bond investments to buy stocks. Sadly, this is occurring a little late -- just as many stocks are reaching record highs.
House prices hit all-time high
Canadians housing sector stakeholders have a similar problem. Home prices here hit all-time highs in December. As many outside observers, such as Deutsche Bank point out, real estate prices here are now in overvalued territory, trading at inordinately high levels relative to incomes and rents. In short, now is unlikely the ideal time to buy a house or a condo if you are looking for a quick gain.
Debt near record level
So if you can't invest in stocks, bonds or housing, what should you do with your extra cash? One solution would be to pay down debt. According to Statistics Canada, household debt relative to personal disposable income rose to a near record 1.63 per cent in the third quarter of last year. That means for every $100 they earned last year, Canadians owed $163.
True, the interest payments on much of that debt are fairly low. For example the Royal Bank's posted five-year mortgage rate is just 5.34 per cent. Many places lend for less. That means those who pay down that Royal Bank debt this year will reduce their interest payments by 5.34 per cent of the amount paid. That's not a bad return considering that those savings will be risk-free and tax-free.
Those gains rise substantially for Canadians who pay down some of the more than $72 billion in credit card debt owed, which often comes with interest rates in excess of 20 per cent. You are unlikely to earn that much in stock or housing investments.
Peter Diekmeyer is Bankrate.ca's economics columnist. He can be reached at firstname.lastname@example.org