Cash deposits can potentially offer a hedge against economic downturns. Compare your options when reviewing deposits vs investing for long-term goals.
What is the best way to hold cash?
As economic uncertainty shrouds the markets, many of our clients will invariably wonder: what should I do with my cash in this volatile environment? With interest rates anticipated to be higher for longer, many are finding cash instruments to be increasingly attractive options.
Pinpointing exactly how to optimise your cash is essential, but it can often be overlooked. By dividing your wealth into identifiable sections, you can map objectives that align with your intentions. Whether it’s liquidity for purchases or dry powder for future investments, deposit products can potentially offer predictable income and robust capital protections.
How much cash should you be holding?
A successful cash management blueprint begins with an understanding of your expected cash flows and risk tolerance. We aim for an optimal blend of yield and liquidity – dividing your cash into distinct segments called ‘buckets.’
Many clients find themselves holding onto too much cash. Learning to bucket your liquidity can help you make use of higher yielding products, optimising the performance of your overall portfolio. Here’s an example of what an effective cash strategy can look like:
To determine the right amount of cash to place in each bucket, we segment your liquidity into three categories, based on when you will need access to your funds. Since there’s a trade-off between liquidity and yield, this could be key to helping you achieve your long term objectives.
SEGMENT BALANCES BY LIQUIDITY NEEDS
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Characteristics: This bucket focuses on providing instant access to liquidity and usually offer lower yields. It should therefore be kept minimal and frequently replenished.
Whether it’s a time horizon of six months or five years, you need to consider keeping cash on hand to ensure your transactions can settle. The same principle applies when operating your investment portfolio. The amount will likely depend on factors such as your ability to generate new inflows, risk tolerance, or illiquidity in longer-term investments.
Consider: How much you may need to cover spending, or to operate your investment portfolio. Consider the minimum level of cash you might need to pay for day-to-day expenses.
Strategy: The main purpose of our brokerage cash account is to help you fund your daily operating needs by offering same day liquidity and capital preservation.
Characteristics: A reserve bucket is set aside for future use, encompassing ventures such as timely investments, tax payments or large capital expenditures. This bucket focuses seeks to optimise liquidity and yield, and is ideally used 2-3 times a year for funds in excess of your day-to-day bucket.
Consider: How much capital you might want to allocate towards attractive investment opportunities in the near term.
Strategy: Time deposits can help you maximise potential returns while aiming for investments/acquisitions with defined controls. The increased yield is a trade-off for reduced liquidity, meaning it could be important to consider structuring your cash correctly.
Characteristics: A strategic liquidity bucket is intended for those who think of cash as an investment in the current environment. Usually, it aims for predictable income, capital protection and the highest yielding for deposit strategies. These funds should be accessed less than once a year.
Consider: “I want to set aside cash that can earn predictable income, no matter what’s happening in the markets.”
Strategy: 12-month deposit ladder. This portfolio consists of four quarterly deposits, with maturities spread out over the course of one year. Over time, the “ladder” structure remains in place by re-investing proceeds from maturing time deposits into new time deposits with a 12-month maturity. This is an efficient cash management strategy that provides you quarterly access to liquidity, as well as offering potential for enhanced yields.
I’m ready to optimise my cash levels. What are my next steps?
At J.P. Morgan, we take the time to understand your wealth aims. The strength and security of our balance sheet helps keep your assets safe, so you can entrust your assets with confidence.
As well as the strategies mentioned in this article, we offer deposit offerings and other cash alternatives, tailored to your goals. To learn more about how we can help you implement a goals-based cash management approach, reach out to your J.P. Morgan team.
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