Is your money working its hardest for you?

Where do you want to be in 10 or 15 years? If your portfolio is holding an excess of cash, that may not put you in the strongest position to get there.

Cash has its purpose, especially when it comes to short term expenses up to 12 months out. But holding more than you need may come at a cost in the long-term. Investing the excess cash, using exposure to stocks, bonds—or typically, an asset mix of both—can make your money work its hardest for you to reach your goals.

Cash’s value is eroded by inflation

Cash may have felt like a “safe haven,” and in recent years of high interest rates, an income source. But inflation undermines the value of cash. Inflation may be cooling but it hasn’t disappeared. Cash could be the more risky choice long-term, especially combined with falling interest rates.

If your portfolio relies too heavily on short-term cash holdings, you may be limiting your ability to grow your capital over time and achieve your long-term financial goals. Staying in cash too long, or too often, could mean being forced to take on more risk later or lowering your overall wealth goals.

Cash will always be a critical part of an overall strategy, but could too much right now be the riskier choice? Keeping too much can be costly. Investing in the right mix to help you achieve other goals has historically been the key to investment success.

Leave cash for the multi-asset opportunity

Last year, the S&P 500 delivered a 26% total return. It’s understandable that many people may have missed out—by sitting in more cash than they need, and for too long.

After 2022, which was one of the worst years for a stock-bond portfolio since the 1970s, a risk-free portfolio of cash seemed attractive. This time last year , economic growth looked uncertain, inflation was elevated and the odds of a recession were higher. But flash forward to 2024: Growth has proved resilient, inflation is cooling and the economy seems to have glided into a “soft landing.” 

The Federal Reserve (Fed) is expected to start cutting interest rates this year—we think in June. Once that happens, it means far lower cash rates. Reinvesting short-term cash-like investments when they mature would prove disappointing.

We believe that a well diversified multi-asset portfolios is essential for most investors. Often, the traditional multi-asset mix is a 60% stocks and 40% bonds but yours may look different, depending on your risk appetite and long-term goals. In the example of the 60/40 portfolio, two-thirds of returns historically came from the stocks¹.

If you still have excess cash, we believe the time to move may be now.

Fixed income: Critical, typically more predictable than stocks

One of the first places to invest when you step out of cash:  into fixed income (often in the form of bonds), which has historically served as the ballast, steadying a portfolio.

The role bonds play is a critical one. Fixed income has typically been a safer way than equities to outperform cash. Even in 2023, when cash rates were at an elevated level because the Fed raised interest rates, fixed income still outperformed cash (5.6% annualized for the Bloomberg Barclays US Aggregate bond index vs. 5.1% for cash).

Right now, we believe that interest rates are in the process of peaking for this economic cycle. That makes locking in these higher rate levels for longer, through bonds, is particularly appealing.

Using Equities for long-term growth

History has taught us that equities are your portfolio’s growth engine to meet your long-term goals.

Is it “too late,” in light of the stock market rally? Sometimes clients ask whether they should wait for a “pullback” in the stock market. We don’t think so. Examining history convinces us that the year after an all-time high often brings even more equity market gains. Examining data back to 1970 shows that one year after hitting at a new record high, the S&P 500 was up more than 70% of the time (returning a median of 12.1%). 

In shorter time frames, too, strong gains have often followed big rallies. Our analysis found that after calendar years with equity rallies of 20% or more (that’s happened 14 times since 1970), after 11 of those years—nearly 80%—the market ended the next year higher.

The power of being fully invested is that historically, by spending more time in the market, it helped overall returns significantly. Just missing the 10 best days—over 20 years— would slash your total return by half, vs. having stayed in the market. In history, seven of the best days occurred within 15 days of the 10 worst days. 

Look at the data—not the headlines

Early in 2023, many predicted a “hard” economic landing and recession, leaving many people nervous and pessimistic. Yet as professionals, we stuck to the corporate data, and it said something different. Because of our access—the advantage of consistently talking to the CEOs and CFOs of the companies in which we invest—we had confidence in our market exposure last year. We found corporate managers last year were cautious but also constructive about their businesses.

The power of active, professional management brings investment experience, and the oversight of an professional chief investment officer who is not swayed by news headlines. Logical interpretation of data, level-headedness, a time-tested investment philosophy and our teams’ discipline: these, not emotions, are what guide our decision making.

We can help

To help ensure you have the right amount of cash and are positioned for success in 2024, contact your J.P. Morgan team.

¹Based on yield to worst for bonds and dividend yield for equities. Bloomberg Finance L.P. as of 3/31/23 back to 12/31/1975. 60/40 = S&P 500 / US Agg portfolio rebalanced monthly. Price return for bonds calculated based on difference in total return for US Agg over 2 year period vs. the starting yield to worst.