Advice for Small Business Owners

Investing and Saving

By Elie Kochman on December 17th, 2009

For the average person with some money to invest, a recession can be a golden opportunity. As the economy slows, prices of stocks fall across the board, even for companies not directly affected by the cause of the economic collapse. As a result, for those who can afford to do so, investing at this time can translate to getting bargain deals on various stocks.

The catch, of course, is that such investments are still a gamble, and the wise investor does not put up money that they cannot afford to lose. Perhaps that is the explanation for the survey released by RBC which I was reading about on the 680 News website. In the last year, the survey found an 8% drop in the number of Canadians saving or investing for retirement.

The article, which first appeared in the Canadian Press, suggested that this might be on account of high unemployment, resulting in less disposable income. However, I don’t believe that this can fully explain the observations.

First, in recent months, the unemployment rate has slowed its rise, and may be falling, albeit slowly. Looking at the history of unemployment rates, you will notice that 8.5% unemployment is not up from 0% or 1% – it’s up from 6% or so, which is a difference of 2.5% and can therefore not explain the 8% difference in the number of people saving. While I don’t mean to belittle the numbers, and acknowledge that a 2% change in the unemployment rate is significant, it is not the determining factor here.

In fact, with rising unemployment, you might expect to see an increase in savings, as people try to create a larger buffer for themselves in case they too join the ranks of the unemployed. While those who are not employed are unable to save, it would be assumed that those with a job would try to be more frugal in order to protect themselves.

I think the real issue in this case is not any concrete reason for lack of investment, but a general lack of knowledge, and fear of the unknown. Yes, the markets seem to be falling, and are therefore perceived as a high risk. However, if you’re saving for retirement, short term fluctuations in the market are almost irrelevant, as over the course of 10 or more years, the market has always gone up.

What seems to point this out to me, and to highlight this issue, is the fact that not only are fewer people investing, but they are also not saving. This indicates that there is consumer confidence, in that spending has not slowed, and in fact, may have gone up. However, with all this extra money that could be saved and isn’t, it indicates a lack of understanding of the long term effects of investments.

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