Are you putting your cash to work?

Not long ago, it didn’t matter much where you held your cash. Whether in a simple deposit account or money market fund, cash earned near zero returns.

But now that interest rates and inflation are both higher, where you allocate cash matters—a lot. Reaping a higher yield on liquid investments could help offset inflation’s erosion of your purchasing power.

It’s therefore a good time to overcome any loss aversion that might be stopping you from acting in your best interests with your cash. This article from our in-house behavioral scientist might help. 

We also suggest you consider putting cash to work as soon as possible―and here describe four ways you might do that and still remain relatively liquid.^1*

Create the possibility that you might gain yield

Which option you choose should depend upon your needs, risk tolerance and timeline:

1. Do you want to be extremely conservative?
 
If you experience strong loss aversion, you might want to choose one of the safest, most stable options for putting your cash to work. Consider funding a CD¹ (certificate of deposit account, i.e. savings accounts that offer higher interest rates because the bank holds a fixed amount of money for a fixed period of time).

If you are comfortable leaving a sum untouched for an amount of time (typically for three, six, nine or twelve months), you might reap a higher yield than with a standard deposit account. These funds are secured by the U.S. government, which are insured up to $250,000 in any single deposit account by the Federal Deposit Insurance Corporation (FDIC).

2. Do you need daily liquidity?

If you are willing to assume a relatively low level of risk in exchange for slightly higher potential returns, consider money market funds.²

The yields on money market funds have increased significantly since January 2022.³ They enable regular withdrawal of money, but the funds kept in the account are actually invested in the market. Money market funds are not federally insured, so there is possibility of loss. However, they generally invest in low-risk, high-quality, short-term debt securities and are very highly regulated.

Among money market funds, the ones with the least risk but lowest yield typically invest in short-term Treasury securities. Next―in terms of both risk and yield―would be money market funds that invest in high-quality, short-term instruments, such as investment-grade commercial paper (unsecured, short-term debt issued by corporations), CDs, and government agency debt.

The third type are tax-aware money market funds that invest in municipalities’ debt and can offer yield with potential tax advantages. For people in the highest tax brackets, municipal money market funds may be a viable option.⁴

3. Can you afford to tie cash up for nine or more months?

If you can take more risk for the potential of more reward, consider investing in a mutual fund⁵ that makes slightly longer-duration investments than a money market fund. Extending duration now when we are likely approaching peak rates might lead to price appreciation if bonds are issued at a lower rate in the future. Bonds purchased today could then be worth more in 12 months.

Some mutual funds also invest in securitized credit and corporate securities and are taxable. Others invest in municipal bonds (“munis”), the debt securities offered by a state, country or municipality to fund their capital expenditures. Muni funds’ yields can also offer tax advantages.

4. Are you able to set aside cash for 12 to 24 months?

If so, you may want to choose a customized bond allocation in a separately managed account (SMA).⁶  With these accounts, investors directly own a collection of assets, including underlying assets like Treasuries, munis or corporate bonds.

Directly owning these assets may allow you to customize holdings while maintaining flexibility and control of the individual bonds until you are ready to sell or the bonds mature. Also, maintaining a long-term mindset can help reduce feelings of uncertainty. 

Avoid inflation eroding the value of your assets

In uncertain times, it’s natural for many people to hold on to more cash than they need. But in a high inflationary environment, that strategy can be counterproductive.

Of course, others get nervous that they might not have enough cash on hand when it’s needed for large purchases or unexpected expenses. As back-up, you can establish a Portfolio Line of Credit (PLC).⁷ You may never need to use that PLC, but it’s there when you need it, freeing you from keeping large cash reserves idle or selling carefully selected assets in your portfolio.

We can help

We offer these ideas to get you thinking. But no financial decision should not be made in isolation. Speak with your J.P. Morgan team. They can help you create an approach that makes sense for you and supports your long-term goals.

*INVESTMENTS INVOLVE RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. Yields are indicative, subject to change and are not guaranteed. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation. Read “KEY RISKS” below.

Key Risks

^1* Remember: investment products are not insured by the Federal Deposit Insurance Corporation, have no bank guarantee and may lose value and involve risks.

¹ Bank deposit accounts, such as checking, savings and bank lending, may be subject to approval. Deposit products and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Early withdrawal penalties apply. For more details on the terms and conditions that govern the Certificates of Deposit, please refer to the Combined Terms and Conditions or the International General Terms for Accounts and Services Account Agreement, as applicable (the “Terms”).

² MONEY MARKET FUNDS: You could lose money by investing in the Fund. Although Stable NAV Funds seek to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Investors should carefully consider the investment objectives and risk as well as charges and expenses of the Fund before investing. The prospectus contains this and other information about the mutual fund. Read the prospectus carefully before investing.

Funds that invests primarily in bonds, are subject to interest rate risks. Bond prices generally fall when interest rates rise. For some investors, income may be subject to the Alternative Minimum Tax. Income from investments in municipal securities is exempt from federal income tax. The risk of a municipal obligation generally depends on the financial and credit status of the issuer. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.

³ Bloomberg Finance, L.P., J.P. Morgan Private Bank.  As of June 2023.

⁴ This material is distributed with the understanding that it is not rendering accounting, legal or tax advice. Consult your legal or tax advisor concerning such matters. For a complete discussion of risks associated with any investment, please review offering memorandum and speak with your J.P. Morgan Advisor. JPMorgan Chase & Co. and its subsidiaries do not render accounting, legal or tax advice

⁵ MUTUAL FUNDS: Investors should carefully consider the investment objectives, risks, charges and expenses of the mutual funds before investing. The prospectus contains this and other information about the mutual fund and should be read carefully before investing.

Funds invested in bonds and other debt securities will change in value based on changes in interest rates. If rates rise, the value of these investments generally drops. Income from investments in municipal securities is exempt from federal income tax. The risk of a municipal obligation generally depends on the financial and credit status of the issuer. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.

⁶ SEPARATELY MANAGED ACCOUNTS (SMA’s): An SMA is a portfolio of securities managed on a client’s behalf by a portfolio manager for a fee. The portfolio manager has discretion to implement the portfolio per the stated investment objectives of the SMA.

SMA’s are subject to market risks. Investment return and principal value will fluctuate so that when an account is liquidated, it may be worth more or less than the original value. There can be no guarantee the objectives will be met.

SMA’s that invests primarily in bonds, are subject to interest rate risks. Bond prices generally fall when interest rates rise. For some investors, income may be subject to the Alternative Minimum Tax. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.

⁷ PLC – Bank products and services are offered by JPMorgan Chase Bank, N.A. and its affiliates.

Portfolio Lines of Credit are extended in J.P. Morgan’s discretion and J.P. Morgan has no commitment to make loans to you under a Portfolio Line of Credit. Any loan extended under a Portfolio Line of Credit is subject to credit approval by J.P. Morgan and, if approved, the terms and conditions contained in definitive loan documentation governing the line of credit.

A line of credit collateralized by the securities in your investment account(s) involves certain risks and may not be suitable for all borrowers. J.P. Morgan assigns values to these securities and, at any time and without notice to you, may increase or decrease these values or change the eligibility of these securities as collateral. A decline in the value of these securities collateralizing your portfolio line of credit (whether due to a market downturn, market volatility or otherwise) directly impacts the amount of credit available to you and may require you to provide additional collateral and/or pay down your line of credit in order to avoid the forced sale of these securities by J.P. Morgan. Please review these and other risks in more detail and/or in conversations with your advisor and make sure to read your line of credit documentation carefully so that you fully understand your obligations and the risks associated with this opportunity.