Jim Hilderbrandt

Executive Director and the Head of Lending Distribution, J.P. Morgan Wealth Management

Volatility in the market over the last few years has prompted many wealth management clients to wrestle with whether to invest their cash or keep it on the sideline. With short-term cash and cash equivalents paying approximately 4.5%, the S&P 500 up 15% year-to-date and fears of even a mild recession, many find themselves struggling with making the decision to deploy their cash reserves into the markets.

Some commonly asked questions:

  • How much cash do I need to keep on hand?
  • Is it the right time to put my money to work?
  • What if an unexpected expense arises and I need the money I just invested?

If this sounds like you, then one of the best courses of action is to take a look at your broader financial plan in order to determine whether remaining in cash or short-term liquid alternatives for an extended period of time will help achieve your long-term goals or actually diminish the chances of reaching them.

Financial planning can offer strategic answers

Financial planning is a cornerstone of a holistic wealth management practice that seeks to create a deep understanding of your needs and wants in order to develop strategies that can comfortably meet them. This dynamic process is fluid, requiring regular updates throughout your life to accommodate for changes, unexpected events and fluctuating economic conditions.

What to do with your cash is often a big part of financial planning. In approaching the dilemma, a financial advisor can help you evaluate what you need your money to do for you in order to help you reach your biggest financial targets. They can guide you through an exercise of understanding your cash flows, other sources of wealth and planned expenditures to answer the following questions:

  • Is the cash you’ve amassed designed to be a rainy day fund, earmarked for a specific expense or actually a stockpile of uninvested funds that needs to be deployed toward your long-range goals?
  • How much emergency cash is appropriate for your situation?
  • How will you manage the inevitable unexpected expense that exceeds your emergency reserves?

This process can help give you a clear picture of just how much you need to keep in short-term liquid savings vehicles and which dollars you may want to place into suitable longer-range investment strategies. After all, cash isn’t always king.

Time in the market has historically tended to outperform timing the market

Many investors fear the impacts of short-term volatility when trying to decide when to deploy money into the market, but studies show that being invested over time typically outperforms an active market timing strategy. Meaning, regardless of whether long-term dollars were invested on the best or worst days of the market, a buy and hold strategy tends to realize better overall growth than constantly moving in and out of the markets because of the likelihood of missing its “best days.”

Backup sources of liquidity

Another barrier to entering the stock market is the concern of needing access to those funds before they have had a chance to grow – or worse, when they may have been devalued due to market movement. A valuable tool for a well-developed, long-term investment strategy that provides quick and easy access to capital instead of liquidating your portfolio’s holdings may be a securities-based line of credit.

Securities-based lending is a form of credit backed by taxable marketable securities. In order to determine the amount of available credit and interest rates charged on a portfolio line of credit, many institutions that offer securities-based lending will analyze the credit quality and market value of underlying collateral assets. Clients often pay no fees to set up these lines of credit and are only charged interest on the amounts borrowed.

A portfolio line of credit can be an effective backup source of liquidity that helps insulate a portfolio from untimely liquidations, capital gains and loss of investment income. A credit line may also be a more tax efficient method of managing short term cash needs while maintaining longer term investment strategies.

Although interest rates have risen sharply in the last two years, borrowing against your fully invested longer term portfolio may still offer you a strategy that enables your principal to grow while outpacing your cost of capital. Depending on asset allocations, market performance and amounts borrowed, the underlying portfolio may be able to support the loan fully without sacrificing material upside on the principal compared to remaining all in cash.

Managing an unexpected opportunity

Imagine this: Bob and Janet have a 20-year horizon before they wish to retire. They recently sold a property and netted $1 million in cash that needs to be invested to help realize their retirement nest egg planning goal.

The couple expects to buy a rental property for around $200,000 that will generate monthly income, so they invested $1 million into a portfolio that expects a 9% annual return (please note you cannot invest directly in an index). Next, they establish a credit line against their investment portfolio and borrow $200,000 to handle their investment property purchase at 7.7% interest. The returns from the portfolio pay interest and the income from the property reduce principal each year for the first four years, enabling their investments to grow to $2,290,369.68 over a 10-year time frame.

A complement to your investment strategy

In the end, the decision to move money out of cash and into the market is largely driven by the ultimate intended use of those funds. Everyone should maintain some amount of emergency reserves in a highly liquid investment that is easy to access when unexpected expenses arise, but a holistic wealth plan can help you see just how much of those dollars need to be working harder in the context of the overarching plans you’ve built to reach your financial goals.

Hence: A portfolio line of credit can be a solution that is both complimentary to your longer term investment strategy and offers you peace of mind to know that you have less disruptive options than liquidating your portfolio. Portfolio lines of credit are generally easy to establish and offer the most attractive borrowing cost of most traditional consumer credit products available, which make them a potentially valuable tool to have in your financial toolkit well before you need it.

The following generally applies to portfolio lines of credit:

  • No fee to establish
  • Doesn’t pull or report to the credit bureaus
  • No unused credit charges
  • Interest billed only on funds borrowed

Contact a J.P. Morgan professional

In order to evaluate your financial goals and how a credit line may be able to complement your investment needs, contact a J.P. Morgan advisor today and ask about the borrowing power you may be able to establish through a portfolio line of credit.

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The S&P 500 Index is an unmanaged broad-based index that is used as representation of the U.S. stock market. It includes 500 widely held common stocks. Total  return figures reflect the reinvestment of dividends. “S&P500” is a trademark of Standard and Poor’s Corporation.

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