Do you have the right amount of cash for you?
With rising inflation and interest rates, it can be challenging to know how much liquidity to keep on hand…and where to keep it. We put together some tips and insights to help you think through a potential liquidity strategy in this changing environment.
Let’s take a look at the purpose of the cash you’re holding and why you need it. There may be opportunities to optimize based on rising rates and inflation.
To cover operational expenses
- Key consideration: Think about how many months or years of operational expenses you plan to cover with this liquidity. Then talk to your J.P. Morgan team to discuss if this amount may be appropriate. This number is often the first step to not overfunding this bucket.
- For everyday banking, FDIC-insured liquidity, stick to cash in an interest-bearing deposit account1. These funds are also secured by the U.S. government, and are insured up to $250,000 in any single deposit account by the Federal Deposit Insurance Corporation (FDIC).
- For daily liquidity, there are investing options available. Starting with if you’re willing to assume a relatively low level of risk in exchange for what are typically slightly higher returns, consider money market funds,2 the yields on which have increased significantly since January 2022. Money market funds enable regular withdrawal, but the funds kept in the account are actually invested in the market. As a reminder, investments such as market funds are not federally insured, are subject to investment risks and can lose value. However, they generally invest in low-risk, high-quality, short-term debt securities and are very highly regulated. Next in terms of both risk and yield would be prime money market funds, which invest in commercial paper issued by banks and corporations.
- In a top tax bracket? Consider tax-aware money market funds that invest in municipalities’ debt and offer yield with potential tax advantages. For people in the highest tax brackets, municipal money market funds1 may be a viable option.
- As the months of operating experiences you plan to cover increase, the potential opportunities for how to invest that cash increase (e.g., options for expenses in the next few months could be different than options for the next 12—18 months).
Planning for a large outlay
- Key consideration: How much time could there be until your large expenditure? If it could be months, or even a year, your options can vary widely.
- If you have a specific timeline that is three months or more, for banking options consider funding a CD1 (i.e., a certificate of deposit account), as it may result in a higher yield than with a standard deposit account. These funds are also secured by the U.S. government, and are insured up to $250,000 in any single deposit account by the FDIC.
- If you have a specific timeline and capacity to take a small amount of market risk, consider investing options such as a short-term bond funds3 with the potential to earn more yield than a money market fund1 or CD in exchange for market risk that may lose value. Remember, market funds are not federally insured, are subject to investment risks and can lose value.
- If you want to be prepared to make a purchase at any time, you might consider a Portfolio Line of Credit (PLC)4 to create liquidity. While interest rates are rising, rates are still historically low and the additional flexibility they can provide can be a valuable tradeoff.
Planning for the unexpected
- Key consideration: Many individuals value having a baseline amount of liquidity as a psychological safety net, not necessarily tied to any specific outlay or goal. There are many ways to think about how to access a liquid safety net.
- Many of the aforementioned products can be structured to provide a safety net, but depending on the size of the safety net you’re looking for, it can cause a drag in your portfolio to have this component of your liquidity in literal cash. Often, simply having access to liquidity can fit this need. Opening a PLC,4 where you have the opportunity to borrow against your portfolio at still historically low interest rates, can help you keep your intentional cash management or investment strategy on track.
- Talk to your J.P. Morgan team so you both know the amount you need to sleep at night. Revisit the number periodically, as your perspective and obligations may change.
Let’s examine why you’ve accrued excess cash, and where to adjust your cash management strategy to help you meet your goals.
Building up excess cash for volatile times
- Key consideration: Think about all your goal-aligned buckets (portfolios), lifestyle in particular, as you set aside and size this buffer. Taking a holistic view with the help of your J.P. Morgan team can help determine the amounts of liquidity across all buckets to avoid double allocating.
- If you and your J.P. Morgan team agree you have more than you need, but you still worry about the unexpected, a Portfolio Line of Credit (PLC)4 can help provide a safety net. You have the opportunity to borrow against your portfolio at reasonable interest, and can keep your intentional cash management and investment strategies on track.
Examining a long-term investment portfolio in light of market changes
- Perhaps the cash was earmarked for long-term investment, but until recently, the fixed income environment didn’t feel too exciting and equity markets felt richly valued. With rates having risen, equity valuations more modest and increased market turbulence, we’re working closely with clients to reposition their portfolios. Explore our Mid-Year Outlook, where we outline three potential ways inventors may want to assess their portfolios in this current environment.
- Rely on core fixed income as a portfolio ballast
- Prioritize quality in equities
- Position for structural change
Opportunistic “dry powder” for the next great idea
- Key consideration: In this market, there can be time-sensitive opportunities, but setting aside a large amount of idle cash has more opportunity cost than previously, with federal interests rates having moved from the near-zero range in December 2020 to 2.25—2.5% as of July 28, 2022. Ensure you’re being intentional on how much your holding and where to meet your financial goals.
- Looking for new investment ideas? Talk to your J.P. Morgan team about some of our top investment themes, and some of the megatrends we see developing. Also, read our Mid-Year Outlook to see how we think investors can strengthen portfolios.
- A PLC,4 through which you can borrow against your portfolio, can give you quick access to liquidity so you can nimbly execute your next idea, and keep your investment and cash management strategy on track.
Considering a new financial goal
Great! Talk to your J.P. Morgan team about how your new goal can fit into your overall plan. Better understanding your time horizon, risk tolerance and priority for this goal will help your J.P. Morgan team determine potential strategies to incorporate into your plan.
Talk to your J.P. Morgan team with some key questions in mind, such as:
- What is your ideal amount of cash and why?
- Over what time period do you need more cash?
- Has anything changed that prompted you to feel like you needed more cash?
When trying to cover a cash shortfall, market volatility and potential tax burdens from liquidity events should be carefully assessed. By seeking to understand your cashflow situation now and in the future, you and your J.P. Morgan team can help determine options to fund your cash needs—whether that’s selling investment positions or considering a line of credit4—to help you meet your liquidity needs and stay on track with your goals.
Ready to invest in services? Find the right strategy with a J.P. Morgan advisor today.
*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.
1Bank 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”).
2MONEY 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, they cannot guarantee they 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 risks as well as the charges and expenses of the Fund before investing. The prospectus contains this and other information about the money market 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. Capital gains, if any, are federally taxable. Income may be subject to state and local taxes.
3MUTUAL 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.
4PLC—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.
