locate an office

offices near you

office near you

Goals-Based Wealth Planning

The Opportunity Cost of Holding Too Much Cash

Jul 25, 2023

Holding too much cash can have a significant impact on your long-term financial goals.

Sameer Mehta, Head of Goals-based Planning

 

Many clients find themselves holding onto a large sum of cash, waiting to find the right time or purpose to utilize it. Perhaps you set aside the cash for a large purchase such as a new vacation home, or you are waiting for the right opportunity to invest into the market. Whatever the reason, holding too much cash can have a significant impact on your long-term financial goals.

Cash comes at a cost

When you are holding on to more cash than you need, it comes at a cost – the opportunity cost of the potential returns you could be missing out on by not investing that cash into the market. While cash may feel safe and secure, it is important to remember that inflation can erode the purchasing power of your money over time. In other words, the longer you hold onto cash, the less it will be worth in the future.

Illustrating the real opportunity cost through a case study

It can be difficult to emotionally connect with the idea of missed investment returns. This is natural, but it is important to understand how this could impact your long-term financial goals. The concerns and emotions of the present greatly outweigh the feelings of the distant future. This is what behavioral scientists call present bias. At the same time, the principle of loss aversion tells us that potential losses are more painful, and more motivating, than potential gains. So when we are hesitant to “lose” our cash in the present, we owe it to ourselves to make the most rational, balanced decision possible by also considering exactly what we might “lose” in the future if we don’t invest.

Let’s take a look at the case study below that demonstrates how not investing your cash may lead to missed potential opportunities for growth.

The situation

Sophia recently sold a stake in her successful cosmetics business for $35MM. After having set aside $5MM towards short term commitments and a real estate investment, she approached her team at J.P. Morgan about a strategy for the rest of her portfolio. She had no other needs for liquidity or income, but felt hesitant about being fully invested in the market given the uncertainty. Sophia felt that keeping aside 30% in cash might make her more comfortable. 

RANGE OF PROJECTED WEALTH VALUES*

Source: J.P. Morgan Private Bank. Data as of July 18, 2023. 
Assumptions: Initial value = $30.0mm, Scenario 1: 40% MSCI World / 60% Bloomberg Global Aggregate Bonds Scenario 2: 28% MSCI World / 42% Bloomberg Global Aggregate Bonds and 30% in cash, no withdrawal, no taxes.

Our approach

Using our goals-based planning model, her team demonstrated that if she invested in a diversified portfolio of stocks and bonds4, she could potentially earn an expected annual return of 6.4%5, which would grow her wealth to approximately $99.5MM6 in 20 years. However, if she were to keep aside 30% in cash7 while investing the rest in the same portfolio, she would only have $81MM8 in 20 years. Her team explained that this was a difference of what would be an additional ~ $11MM9 in today’s dollars – more than a third of the surplus she had today.

The Outcome

Sophia began to think of what she could achieve with that additional wealth if she had it today. 

After some deliberation and a detailed analysis, she agreed that holding 10% in cash was more appropriate and still provided her with a psychological safety net that would allow her to mind to be at ease.

She realised that by holding on to too much cash, she was essentially limiting her potential for growth and putting her long-term financial goals at risk.

Finding the Right Balance

There is no perfect answer. When it comes to creating your wealth plan, think about what is important to you and the intent of your wealth. Have an open dialogue with your family. Agree on what you would all collectively like your wealth to achieve for you as you build a goals-based plan.

Finally, it is important to regularly review your investment portfolio to ensure that it is aligned with your long-term financial goals and risk tolerance. Do not let the opportunity cost of holding too much cash impact your long-term financial goals.

To help you define your liquidity bucket and evaluate your own cash management plan, talk to your J.P. Morgan team. We can help you develop an investment strategy that is aligned with your goals and risk tolerance.

Notes:

MAPS Analysis

IMPORTANT: The projections or other information generated by the Morgan Asset Projection System (“MAPS”) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual or estimated investment vehicle results and are not guarantees of future results. The results may vary with each use and over time. Furthermore, the material is incomplete without reference to, and should be viewed in conjunction with, the verbal briefing provided by J.P. Morgan representative. For further information, see disclosures entitled “Understanding long-term estimates.”Illustrating the real opportunity cost through a case study.

1 Calculations based upon assumptions listed. For allocation details, see asset allocation page. Tax rates quoted are for the majority of the years in the analysis.

2 “Most probable wealth values,” denoted by the darkly shaded area, indicates the range in and around the 50th percentile. The “50th percentile” indicates the middle wealth value of the entire range of probable wealth values. The “95th percentile” wealth value indicates that 95% of the probable wealth values will be equal to or below that number; the “5th percentile” wealth value indicates that 5% of the probable wealth values will be equal to or below that number.

3 Initial allocation value adjusted for inflation rate of 2.6% per annum. Illustrates the future value that is equivalent to the initial allocation’s purchasing power.

For illustrative purposes only. It is not possible to invest directly in an index.

Footnotes

4 Assumes an allocation 40% MSCI World and 60% Barclays global aggregate bonds, no taxes

5Assumes expected annual return of 6.4% and expected volatility of 7.3%, translating into a compounded return of 6.2% (Source: Long-term Capital Market Assumptions [LTCMA], J.P. Morgan Asset Management, Source Date: November 7, 2022)

6 Indicates median wealth outcome (50th percentile) from the range of outcomes in year 20. The projections or other information are generated by the Morgan Asset Projection System (“MAPS”) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual or estimated investment vehicle results and are not guarantees of future results. The results may vary with each use and over time. Furthermore, the material is incomplete without reference to, and should be viewed in conjunction with, the verbal briefing provided by J.P. Morgan representative.

7 Assumes an allocation 28% MSCI World, 42% Barclays global aggregate bonds, 30% cash, no taxes. Expected annual return of 5.2% and expected volatility of 5.1%, translating into a compounded return of 5.1% (Source: LTCMA, J.P. Morgan Asset Management, Source Date: November 7, 2022)

8 Indicates median wealth outcome (50th percentile) from the range of outcomes in year 20.

9 Rate of discount used is the long-term inflation rate of 2.6% (Source: LTCMA, J.P. Morgan Asset Management, Source Date: November 7, 2022)

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual results or experience of other individuals.

Understanding Long-term Estimates (based on JP Morgan Long-Term Capital Market Assumptions)

Our investment management research incorporates our proprietary projections of the returns and volatility of each asset class over the long term, as well as estimates of the correlations among asset classes. Clearly, financial firms cannot predict how markets will perform in the future. But we do believe that by analyzing current economic and market conditions and historical market trends, and then, most critically, making projections of future economic growth, inflation, and real yields for each country, we can estimate the long-term performance for an entire asset class, given current and our estimated equilibrium levels. The “equilibrium” level shows the average or central tendency around which a market or macroeconomic variable such as yield or credit spread will tend to fluctuate over the long-term, because the level represents the value inherent in a given market. The return assumptions are based on our proprietary process of using a building block approach for each of the asset classes. For instance, the building blocks for equity consist of our projections on revenue and margin growth, dividend yield and buybacks, and change in valuations. The building blocks for fixed income consist of our projections for future yields and the change in bond prices. The estimates for alternatives are driven by our historical analysis and judgment about the relationship to public markets. It is possible – indeed, probable – that actual returns will vary considerably from this, even for a number of years. But we believe that market returns will always at some point return to the equilibrium trend. We further believe that these kinds of forward-looking assessments are far more accurate than historical trends in deciding what asset class performance will be, and how best to determine an optimal asset mix.

In reviewing this material, please understand that all references to return are not promises, or even estimates, of actual returns one may achieve. The assumptions are not based on specific products and do not reflect fees, such as investment management fees, oversight fees, transaction costs or other expenses that could reduce return. They simply show what the long-term return should be, according to our best estimates of current and equilibrium conditions. Also note that actual performance may be affected by the expertise of the person who actually manages these investments, both in picking individual securities and possibly adjusting the mix periodically to take advantage of asset class undervaluations and overvaluations caused by market trends.

For the purpose of this analysis volatility is defined as a statistical measure of the dispersion of return for a given allocation and is measured as the standard deviation of the allocation’s arithmetic return. The Sharpe ratio is a return/risk measure, where the return (the numerator) is defined as the incremental annual return of an investment over the risk free rate. Risk (the denominator) is defined as the standard deviation (volatility) of the allocation’s return less the risk free rate. The risk free rate utilized is J.P. Morgan’s long-term assumption for Cash. Correlation is a statistical measure of the degree to which the movements of two variables, in this case asset class returns, are related. Correlation can range from -1 to 1 with 1 indicating that the returns of two assets move directionally in concert with one another, i.e. they behave in the same way during the same time. A correlation of 0 indicates that the returns move independently of each other and -1 indicates that they move in the opposite direction.

INDEX DEFINITIONS

Representing Global Aggregate Bonds hed, the Bloomberg Barclays Global Aggregate Index is a flagship measure of the global investment grade dbt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. (source: Bloomberg Finance L.P.).

Representing Developed World Equity, the MSCI World Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed markets (source: MSCI Barra).

Indices are not investment products and may not be considered for investment.

Contact us to discuss how we can help you experience the full possibility of your wealth.

Please tell us about yourself, and our team will contact you. 

*Required Fields

Contact us to discuss how we can help you experience the full possibility of your wealth.

Please tell us about yourself, and our team will contact you. 

Enter your First Name

> or < are not allowed

Only 40 characters allowed

Enter your Last Name

> or < are not allowed

Only 40 characters allowed

Select your country of residence

Enter valid street address

> or < are not allowed

Only 150 characters allowed

Enter your city

> or < are not allowed

Only 35 characters allowed

Select your state

> or < are not allowed

Enter your ZIP code

Please Enter a valid Zip Code

> or < are not allowed

Only 10 characters allowed

Enter your postal code

Please Enter a valid Zip Code

> or < are not allowed

Only 10 characters allowed

Enter your phone number

Enter your phone number

Tell Us More About You

0/1000

Only 1000 characters allowed

> or < are not allowed

Checkbox is not selected

Your Recent History

Important Information

Legal Disclaimer

The information on this site may inform you of certain investment products and services offered by the private banking business of JPMorgan Chase Bank, N.A. or any of its affiliates (together, "J.P. Morgan"), part of JPMorgan Chase & Co (“JPM”). No information published on the site constitutes a solicitation, offer or recommendation to enter into any transaction. The products, services, information and/or materials referenced within these web pages may not be available for all individuals or residents of certain jurisdictions.

IMPORTANT INFORMATION RELATING TO J.P. MORGAN PRIVATE BANK PUBLIC WEBSITES

Any views or strategies described may not be suitable for all investors and are subject to investment risks. Please read this Important Information in its entirety.

GENERAL RISKS & CONSIDERATIONS.

Any views, strategies or products discussed on this site 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 does not guarantee a profit or protect against loss. Nothing on this site 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. Contact your J.P. Morgan representative for additional information concerning your personal investment goals. You should be aware of the general and specific risks relevant to the matters discussed on this site. You will independently, without any reliance on J.P. Morgan, make your own judgment and decision with respect to any investment or strategy referenced on this site.

NON-RELIANCE.

Information contained on this site is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of the materials on this site. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary contained on this site, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed on this site constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information on this site in the event that such information changes. Views, opinions, estimates and strategies expressed may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and the content should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing on this site shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing on this site shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.

LEGAL ENTITY, BRAND & REGULATORY INFORMATION

In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB and JPMS are affiliated companies under the common control of JPM. Products not available in all states.

In Germany, this material is issued by J.P. Morgan SE, with its registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt am Main, Germany, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB). In Luxembourg, this material is issued by J.P. Morgan SE – Luxembourg Branch, with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Luxembourg Branch is also supervised by the Commission de Surveillance du Secteur Financier (CSSF); registered under R.C.S Luxembourg B255938. In the United Kingdom, this material is issued by J.P. Morgan SE – London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – London Branch is also supervised by the Financial Conduct Authority and Prudential Regulation Authority. In Spain, this material is distributed by J.P. Morgan SE, Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE, Sucursal en España is also supervised by the Spanish Securities Market Commission (CNMV); registered with Bank of Spain as a branch of J.P. Morgan SE under code 1567. In Italy, this material is distributed by J.P. Morgan SE – Milan Branch, with its registered office at Via Cordusio, n.3, Milan 20123, Italy, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Milan Branch is also supervised by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB); registered with Bank of Italy as a branch of J.P. Morgan SE under code 8076; Milan Chamber of Commerce Registered Number: REA MI 2536325. In the Netherlands, this material is distributed by J.P. Morgan SE – Amsterdam Branch, with registered office at World Trade Centre, Tower B, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Amsterdam Branch is also supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan SE under registration number 72610220. In Denmark, this material is distributed by J.P. Morgan SE – Copenhagen Branch, filial af J.P. Morgan SE, Tyskland, with registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Copenhagen Branch, filial af J.P. Morgan SE, Tyskland is also supervised by Finanstilsynet (Danish FSA) and is registered with Finanstilsynet as a branch of J.P. Morgan SE under code 29010. In Sweden, this material is distributed by J.P. Morgan SE – Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden, authorized by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and jointly supervised by the BaFin, the German Central Bank (Deutsche Bundesbank) and the European Central Bank (ECB); J.P. Morgan SE – Stockholm Bankfilial is also supervised by Finansinspektionen (Swedish FSA); registered with Finansinspektionen as a branch of J.P. Morgan SE. In France, this material is distributed by JPMorgan Chase Bank, N.A. Paris Branch, registered office at 14,Place Vendome, Paris 75001, France, registered at the Registry of the Commercial Court of Paris under number 712 041 334 and licensed by the Autorité de contrôle prudentiel et de resolution (ACPR) and supervised by the ACPR and the Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) SA, with registered address at rue du Rhône, 35, 1204, Geneva, Switzerland, which is authorised and supervised by the Swiss Financial Market Supervisory Authority (FINMA) as a bank and a securities dealer in Switzerland.

In Hong Kong, material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this site have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. You are advised to exercise caution in relation to this site. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. JPMorgan Chase Bank, N.A., a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.

With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund´s securities in compliance with the laws of the corresponding jurisdiction. 

In Australia, J.P. Morgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides, and is regulated by the SEC, FINRA and CFTC under US laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided on this site is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act.

The information on this site has not been prepared specifically for Australian investors. It:

  • may contain references to dollar amounts which are not Australian dollars;
  • may contain financial information which is not prepared in accordance with Australian law or practices;
  • may not address risks associated with investment in foreign currency denominated investments; and does not address Australian tax issues.

References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.

© $$YEAR JPMorgan Chase & Co. All rights reserved.

LEARN MORE About Our Firm and Investment Professionals Through FINRA Brokercheck

To learn more about J.P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products

 

JPMorgan Chase Bank, N.A. and its affiliates (collectively "JPMCB") offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC ("JPMS"), a member of FINRA and SIPC. Insurance products are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

 

Please read the Legal Disclaimer for key important J.P. Morgan Private Bank information in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.