Is It Time to Transition Out of High-Interest Savings Accounts?

Canada is now firmly in its rate-cutting era. The Bank of Canada has slashed rates four consecutive times, bringing its overnight interest rate to 3.75% from 5% in June. That has big implications for your high-interest savings account (HISAs).

Until recently, putting money into HISAs and other cash-like investments has made a lot of sense. As rates skyrocketed and economic uncertainty increased, savers moved billions out of traditional investments and into HISA funds and other cash-like instruments, such as money market funds and guaranteed investment certificates (GICs), because they could keep their money safe from market fluctuations and earn around, if not more than, five percent in interest.

But now that inflation has come down and interest rates have been cut, holding assets inside of a HISA fund may not be as appealing. With the BoC expected to cut rates even further over the coming months, now may be the right time to consider other investment options.

"HISAs are great for parking money but are not long-term assets," says Corrado Tiralongo, Chief Investment Officer at Canada Life Investment Management Ltd., manager of the Counsel Portfolios, "After taxes and inflation, they aren't going to keep up."

Falling HISA Rates

HISA funds earn interest higher than traditional savings accounts, providing investors with steady interest income. Prior to 2022, these funds paid next to nothing because rates were so low. As rates increased, so too did the popularity of HISA funds.

But the fortunes of HISA funds rise and fall alongside interest rates - when rates drop, the interest you earn on these accounts declines, which is exactly what has happened over the last few months. "Rates have come down," says Tiralongo. "You should start thinking about these things now if you haven't already because we expect them to fall further from here."

HISA funds aren't meant to provide investment growth or help people meet their long-term needs, whether that's saving for retirement, buying a house or achieving another financial goal. That's what diversified portfolios do. These vehicles, such as mutual funds, which hold stocks that can grow your money and bonds that can help lower your risk, may provide the opportunity for returns that have the potential to exceed what you would get in a HISA.

"If the money isn't targeted for a specific purpose in the near few years, it should be invested for the long term," says Tiralongo.

Capturing Market Returns

Here's another reason why you might consider moving at least some of your money back into diversified assets: when rates do fall, other securities tend to improve, he explains.

For instance, bond prices increase when rates fall. Stocks often climb, too, because returns on higher rate-paying options, such as a HISA, money market fund or even bonds, become less attractive compared to what you could potentially receive from stocks.

Since it's impossible to time the market - you can't know for sure how much rates might fall further or when stocks or bond prices might climb higher - there's no time like the present to start thinking about moving money into potentially better-returning securities.

"Unless you get lucky timing these things, going from cash to being fully invested is a crapshoot," says Tiralongo. "People should start to think, if they're saving for a long-term asset, they should consider putting that money into longer-term investments which have the potential to return more than safer assets, like a HISA, over time."

Plan Your Strategy

Moving funds into a long-term portfolio from your HISA, however, doesn't mean you have to transfer all your assets at once. Tiralongo suggests investors employ a dollar-cost averaging strategy, which means automatically moving smaller amounts from your HISA into a fund over a set period, such as once a month.

"By doing it systematically you take the emotion out of investing," he explains, acknowledging that putting a large chunk of money at risk in the markets at one time can be stressful. "It helps people sleep better at night."

Whether you decide to shift your money all at once or in stages, you'll want to talk to your advisor before making any significant changes. They can help you determine how best to move your money and what to put it into - such as a balanced mutual fund that holds an almost equal amount of both stocks and bonds or a fund that holds more of one or the other.

Another important role advisors play is helping you avoid making emotional decisions that could impact your portfolio performance today and in the future. That might include panic selling when markets will invariably fall or jumping into a security that doesn't suit your long-term needs.

"Your advisor will help you make good investment decisions based on where you're at in life and where you want to get to," he explains. "Whether it's around moving money out of your HISA or something else, your advisor can help you make a plan - and stick with it."

Unlike mutual funds, the returns and principal of GICs are guaranteed.

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