Holding cash or cash equivalents is not necessarily a bad thing, but holding too much or too little can put your long-term goals in jeopardy.

Amanda Lott, Excutive Director, Wealth Strategist

Emil Friis, Wealth Management Solutions Analyst


Market volatility has shaken investors across the globe, and with levels in equity markets similar to those seen in the pre-COVID-19 world, investors remain skeptical as risks remain. Cautious investors, many of whom have sold out of either their equity or fixed Income investments, continue stockpiling cash or money market funds, but is this the right approach? (Figure 1).  

Figure 1. Mutual Fund Flows

Source: EPFR, JPM CIO Team, as of August 2020.
From left to right, the line graph tracks the performance of equity, fixed income and money market mutual fund flows from 2007 to 2020. The money market line dips to around -$400 billion in 2010, and peaks at around $1,300 billion in 2020.

Short-term interest rates have plummeted as central banks have coordinated their monetary stimulus measures by injecting liquidity into global markets. Although this naturally stimulates economies, it can harm investors who are weary of current market conditions and who are inclined to hold cash instead of traditional investments.

In the United States, cash at least still gives you a positive return of about 0.09% (see Figure 2). However, once we factor in the inflation level (albeit currently low), simply buying Treasury bills is a strategy with negative real returns (meaning it has a rate of return lower than inflation). This is far more obvious in other parts of the world such as Europe, where the short-term rates are already negative.

Remember, when rates are low, not only will your cash not grow, but it puts you at risk of going backward as you lose purchasing power.

Figure 2. 1–3 Month T-Bill Index—Yield to Worst

Source: Bloomberg, JPM CIO Team, as of 7/31/2020.
From left to right, the line graphs shows the yield of 1 to 3 month T-bill index, beginning in 2010 and ending in 2020. Yields remain consistent from 2010 to 2016 at around 0.1%, and begin rising in 2016, reaching around 2.5% in 2019 before dropping to 0.09% in 2020.

Enough to satisfy your short-term needs without jeopardizing your long-term goals.

Despite the negative real return you receive, there are many valid reasons for holding cash, but those reasons need to complement your long-term goals. Determining the “right” amount of cash is a highly personal decision. We recommend the following framework to define the optimal amount for your "liquidity bucket”:

  1. Psychological Safety Net—How much cash do you need in order to feel comfortable or to sleep well at night? Each person may feel differently and have varying comfort levels; therefore, this is a more qualitative, and even emotional, decision. 
  2. Operating Cash Flow—How much are you spending on a monthly or yearly basis? What is the minimum level of cash needed in order to pay for day-to-day expenses? Most expenses, whatever they may be, require cash on hand to make payments. You may choose to keep cash to cover as little as six months of expenses, or as much as five years. The amount of time you can cover with your cash can depend on factors such as your income, risk tolerance or illiquidity in your longer-term investments.
  3. Big Ticket Items—Are you planning on making any significant purchases or financial commitments in the near term? While you may have enough cash for a large purchase, you want to ensure that you do not deplete the other parts of your liquidity bucket or run into a bout of illiquidity if opportunities arise for other investments.
  4. Opportunistic Funds—How much capital do you want available for compelling investment opportunities? Markets can turn in a heartbeat, and you may want to have some extra cash that can be deployed tactically. An alternative to cash in this situation would be a line of credit. One benefit of cash rates being so low is that the cost of borrowing is also very attractive. Think of this as analogous to using a credit card for everyday payments, or taking out a mortgage to buy a home. Borrowing can often be more economically efficient.

Strategies exist for all timeframes and needs.

Once you know your number, how should you best implement your liquidity bucket? Similar to constructing a long-term investment portfolio, we believe one should be intentional in how they structure their liquidity and position for cash needs. While holding cash in a checking account may be the simplest, its yield makes it a less attractive option. Thus, it’s worth exploring other, more unique ways to hold cash that can generate better yields without taking undue risk, depending on the time horizon and purpose for your liquidity.

Leveraging the framework discussed in the previous section, we offer some considerations and high-level strategies below that may serve as a helpful starting place in determining an implementation plan that is suitable for you:

Fig. 3. Liquidity Continuum

Source: J.P. Morgan Private Bank.

*Separately Managed Accounts (SMAs) can be customized to help meet your specific cash flow needs and credit quality preferences. Talk to your J.P. Morgan team member for more information.

The information expressed is being provided for informational and educational purposes only. It is not intended to provide specific advice or recommendations for any individual. You should carefully consider your needs and objectives before making any decisions. For specific guidance on how this information should be applied to your situation, you should consult the appropriate financial professional.

Chart shows different options for holding cash, with time horizon on the vertical axis and risk tolerance on the horizontal. On the bottom left there are options such as Savings/Checking Accounts and Money Market Funds, examples of low risk and short time horizon, while on the top right, there are Short Duration Fixed Income Funds and Separately Managed Accounts, examples of higher risk and longer time horizon.

Excess funds can be used for long-term investing

Once you determine the optimal size of your cash bucket, consider using the excess funds for long-term investing to accomplish your other goals. We often recommend that you keep the two buckets separate: Too much cash in your long-term bucket can be a drag on long-term performance.

Even if you are skeptical of the current market environment, if these excess funds are truly for the long-term, you don’t have to time it perfectly to get it right. Historically, getting invested at market peaks has been better than staying in cash—and keep in mind that cash rates in the past were much higher, too. The most important considerations, then, are your time horizon and risk profile.

Over time, markets go up. Even if you invest while markets are around their peaks, you are most likely going to make money in the long run. In fact, on average, it has made little difference whether you invested at an all-time high or a random day. In both cases, over the entire history of the S&P 500 (since 1928), your average return over the following year would be roughly 8%—and in both cases, you would have made money about 70% of the time.1

Holding cash or cash equivalents is not necessarily a bad thing. However, holding too much or too little can put your long-term goals in jeopardy. Now more than ever, it is important to be intentional about holding the right amount of cash in the right solution so that all of your assets are serving their purpose to help you reach your goals. Reach out to your J.P. Morgan team to help you determine your liquidity bucket and how we can help.  

1 Bloomberg Finance L.P. Data is as of August 25, 2020.