Investment Strategy

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.

Excess cash can limit your capital’s growth, leading to falling short of long-term goals

Growth of $100 since 12/31/91

Equities have served as the growth engine in portfolios to beat inflation over time

Source: Bloomberg Finance LP. Data as of 3/31/23 back to 12/31/1991. 60/40 = MSCI World/U.S. Agg portfolio rebalanced monthly.

 

Outlooks and past performance are no guarantee of future results. It is not possible to invest directly in an index.

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.

Bonds tend to outperform when the fed stops hiking

U.S. core bonds and cash return from the final Fed hike to the final Fed cut, includes Fed cycles from 1971

Bar chart of the U.S. core bonds return and the U.S. cash return between 1971 and 2019.

Source: J.P. Morgan, Bloomberg Finance L.P., Haver Analytics, Ibbotson, from Tim Andres & Ben Bakkum. U.S. core bonds return represented by 50% Bloomberg U.S. Corporate Aggregate Bond Index and 50% Bloomberg U.S. Government Aggregate Bond Index. Data as of December 2019.

 

Outlooks and past performance are no guarantee of future results. It is not possible to invest directly in an index.

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. 

It’s about time in the market, not timing the market

Annualized performance of a $10,000 investment from January 2004 through January 2024

Bar chart of the S&P 500 annualized performance between January 2004 and January 2024 comparing 4 different portfolios: a fully invested portfolio, missed 10 best days portfolio, missed 20 best days portfolio and missed 30 best days portfolio.

Source: J.P. Morgan Asset Management analysis using data from Morningstar Direct. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Analysis is based on the J.P. Morgan Guide to Retirement.

Data as of February 1, 2024.

 

Outlooks and past performance are no guarantee of future results. It is not possible to invest directly in an index.

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.

If your portfolio is holding a lot of cash, history says it may not be positioned for growth.

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Important Information

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

All market and economic data as of February 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

The information presented is not intended to be making value judgments on the preferred outcome of any government decision.

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Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

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