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Investment Strategy

3 actions to help optimize your portfolio in today’s environment

Jul 10, 2023

Increase your liquidity’s potential to generate greater returns. Put the right assets in the right types of accounts. And systematically harvest your tax losses.

While the sometimes-breathtaking market volatility of the past few years seems to have passed, we expect uncertainty to continue. The pressing question, then, is: How might you optimize your assets regardless of what the future holds?

Of course it’s always important to choose investments well and stay invested given that, historically, that has rewarded long-term investors.1 But asset optimization and being tax-savvy in your investments become essential as our Long-term Capital Market Assumptions2 project that equity market volatility over the next 10 to 15 years will likely run slightly hot: an average 16.1% when 14.7%3 is the historical average.

Right now, we suggest you consider taking these actions so you might reap gains:

  1. Put your cash to work
  2. Make sure you have the right assets in the right types of accounts
  3. Systematically harvest losses to potentially reduce the tax bill for your gains  

Here’s how.

Put your cash to work

Inflation remains elevated, but we believe the Federal Reserve could stop hiking interest rates later in 2023. We expect yields to decrease when the market begins to price in rate cuts.

That means where you allocate excess liquidity will become more crucial. Simply holding onto cash would allow higher inflation to reduce its value over time. Also: holding onto and rolling Treasury Bills may have been attractive as yields rose, but now we believe it carries reinvestment risk. The Fed has likely reached the end of its hiking cycle and the market expects lower yields on short Treasury Bills in six months.

What to consider instead?

  1. If you want to be extremely conservative, consider certificates of deposit (CDs)—This could be an excellent, conservative choice you might make if you are willing to leave a sum untouched for a period of time (anywhere from 3-12 months)
  2. If you need or want daily liquidity, money market funds could be a good option—Trading in very short-term debt investments, including Treasuries, commercial paper (a form of short-term corporate debt) and CDs. Investors can move cash in and out of a money market fund as needed, and some money market funds invest in fixed income securities with a small degree of credit risk in exchange for potentially higher returns
  3. If you can put some cash to work for at least nine months, consider strategies that provide liquidity while still allowing you to invest in a wide variety of fixed income securities—Mutual funds pool money from multiple investors and can invest in a range of fixed income securities. However, longer-term securities are more exposed to interest rate risk and can lose value if rates unexpectedly rise. For this reason, we recommend considering those securities that are shorter in duration for clients who can leave cash invested for at least nine months
  4. If you are able to commit the your cash for one or two years, consider a customized bond allocation— Using a separately managed account (SMAs), you can tap into a range of fixed income investments. Unlike mutual funds with which you own shares of a fund, an SMA allows you to own the underlying securities, enabling the potential for greater choice and tax-savings options

Make sure you have right assets in the right types of accounts

It also can make a significant difference where you hold your assets.

Choose poorly and you might wind up paying the highest federal tax rate of 37% on your gains as ordinary income rather than the lower rate of 23.8% for qualified dividend income and long-term capital gains.

That is why we suggest you think carefully about which kinds of investments will be put into which kinds of accounts and consider generally that your: 

  • Tax efficient assets, which may include low-turnover equity, such as emerging market stocks and private equity go into taxable accounts (in which realized gains and income are taxed annually)4
  • Tax inefficient assets, which may include high-turnover equities, high-yield and investment-grade bonds, hedge funds and real estate investment trusts (REITs) go into tax-deferred accounts (that allow you to delay paying taxes until you withdraw the assets)

Systematically harvest your losses to potentially reduce your tax bill on gains

The last six months have been a good time to be invested in equities. The market has been doing well; the S&P 500 is up nearly 15%5 year to date through June on the strength of diminished fears of recession and an improving outlook for earnings. 

While we have a positive outlook on long-term corporate profit growth (which is the engine of equity returns), many catalysts could cause near-term volatility. That’s why investors who are wisely putting their assets into equities now may want to consider investing through a tax-smart separately managed account (SMA) as an option that can potentially enhance their after-tax returns by systematically harvesting losses.

Selling stocks at a loss allows you to use that loss on your tax return to offset realized gains from elsewhere in your portfolio, thereby lowering your ultimate tax bill. Tax-smart SMAs also facilitate the purchase of similar stocks to those that were loss harvested, so your portfolio allocation can remain aligned with your objectives without violating key tax rules.

Such tax-loss harvesting strategies can work in any type of market. But they are particularly compelling in volatile markets when directional trends are unclear.

We can help 

It is important to take the time to make the most of your assets. Portfolio efficiency—from cash management to proper asset location and systematic tax-loss harvesting—requires thoughtfulness and expertise.

Reach out to your J.P. Morgan team so that you might optimize your holdings.

 

1JPMorgan Asset Management Guide to the Markets

2J.P. Morgan Asset Management Long-Term Capital Market Assumptions 2023.

3Historical volatility for U.S. Large Cap Equities (i.e., as measured by the annualized standard deviation of monthly returns of the S&P 500 for the past 20 years, as of March 2023) is approximately 14.8%.

4Turnover, in the context of equity strategies, refers to the rate at which the portfolio’s holdings are bought and sold (measured as a percentage of the total value of the portfolio). A “high-turnover strategy” implies that the portfolio’s holdings are being bought and sold frequently, which may carry tax implications if positions are sold at gains. A “low-turnover strategy” implies that the portfolio’s holdings are bought and sold less frequently, potentially generating less capital gains and concomitant taxes.

5S&P 500 as of June 30, 2023

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Important Information

Tax loss harvesting may not be appropriate for everyone.  If you do not expect to realize net capital gains this year, have net capital loss carryforwards, are concerned about deviation from your model investment portfolio, and/or are subject to low income tax rates or invest through a tax-deferred account, tax loss harvesting may not be optimal for your account. You should discuss these matters with your investment and tax advisors.

JPMAM Long-Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only—they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. “Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.

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