11 June, 2024

Moving Money Out of a High-interest Savings Account

HISAs are a good short-term solution when interest rates are high. In light of the recent rate cuts, there may be better opportunities for long-term investors.

High-interest savings accounts (HISAs) have been all the rage over the past few years as nervous investors looked for safe places to park their cash. With fears of a recession slowly receding and interest rates expected to continue falling, now might be a good time to upgrade your ambitions.

"A high-interest savings account isn't a long-term asset," says Chris Reynolds, co-founder and executive chair of Investment Planning Counsel (IPC). "Interest is fully taxable, and it generally doesn't beat inflation. At some point, long-term investors should reallocate that money into something more growth oriented."

But how should investors move their money back into the market, especially with continued concerns around market volatility, inflation and general economic uncertainty? Reynolds, a former advisor who has been in the financial business long enough to see several market cycles, has a few ideas.

Think about timing

What you transfer your HISA money into - a more conservative or aggressive mutual fund, for instance - is highly dependent on when you'll need to access the money you're saving. So, the first place to start is to consider the time frame. "If you're in your 40s and this is for your retirement, short-term fluctuations in the market should mean nothing to you," Reynolds says.

In most cases, investment decisions are driven by whether your horizon is longer or shorter than a decade. If you have a longer runway, you could consider owning funds that hold companies that will grow significantly over the next 10 years. "Think about where you want to have your money and which companies will continue to provide valuable services over that time," he notes.

If you need your money within five to 10 years, you could play it safer by investing in a balanced mutual fund that holds a mix of growth-oriented stocks and conservative investments, such as higher-yielding bonds or government-backed fixed income. "You'll want to have a little less volatility and greater diversification," says Reynolds.

As you get closer to when you need the cash, a basket of Canadian government bonds could be the way to go. These are some of the safest investments around and may provide higher yields than a HISA. At the same time, when rates start to decline, bond prices rise, so those who do own bonds today, could get some capital appreciation, too.

Update your appetite for risk

A lot of people moved their investments into HISAs because of the economic and geopolitical uncertainty that's marked the last couple of years. As inflation moderates and recession worries lessen, now's a good time to think about how much risk you're comfortable taking on.

It's important to remember that markets move up and down, but they've always risen over time. Still, "risk tolerance is a factor because it prevents people from doing things that are foolish," Reynolds explains. But, he adds, "What's also foolish is seeing a 20% drop in an investment and taking your money out. That's a good way to lose a big chunk of your money."

If you think you can stomach another short-term market drop, then you're likely fine to invest in more aggressive investments. If the prospect of seeing your portfolio decrease makes you feel sick to your stomach, then more conservative investments may be a better way to go. Risk tolerance is difficult for people to assess, so talk through this with an advisor.

Choose your investments wisely

As you populate your portfolio, you should consider holding funds that own companies with good fundamentals that you'd want to hold in whatever economic or investment environment we may be in, says Reynolds.

Also, try to find opportunities that align with your personal investing philosophy while resisting the urge to follow the crowd. "A trend might be your friend for a while, but trends can stop so suddenly that you might not even know what happened," Reynolds notes. "I'm of the Warren Buffett state of mind: look for great companies with a strong moat [meaning a high bar for competitors to enter the same business] and good growth potential and invest in them long term."

Consider moving money over time

While now may be the right moment to consider moving your money back into the market, you don't need to transfer it all at once. If you do need some cash in, say, a year from now, you could keep those dollars in a HISA and continue to earn what should still be decent interest even if rates do start falling.

Even if you're planning to tap into your portfolio years from now, you could still slowly invest those dollars, little by little, through dollar-cost averaging (DCA). This strategy lets you take a set amount of money - say $1,000 every month - and move it from your HISA into the mutual fund of your choosing.

Not only might that help you feel a little better about moving your money into stocks and bonds again, but it also helps to avoid timing the market. The last thing you want to do is try and choose a moment when you think stock prices will rise only for them to fall. "If you try to time the market, you're probably going to be wrong," he says. "Just add it in continually over a set period of time."

Talk it out

Changing investing habits isn't easy - even if you've only started using a HISA in the last two years - so don't be shy about asking for help. Your advisor can help you determine your risk tolerance levels, work with you to set short- and long-term goals and ultimately decide the best place to put your money. "The conversation should be, 'My time horizon to utilize this money is this, but my tolerance to volatility is only within these parameters,'" says Reynolds. "Based on those two factors, your advisor can help design the type of portfolio you should be building."