Markets are changing: Moves to consider making now

Higher interest rates, resilient growth, stubborn inflation – and the looming prospect of a recession taking hold later in 2023 – are reshaping the economic environment.

While you may be tempted to make similarly dramatic changes to your portfolio, instead consider organizing your wealth into three distinct “buckets”:

• One to support your liquidity needs in the next one to five years
• A second to cover your and your family’s lifestyle expenses over your lifetimes
• The third to fund your legacy planning, both during life and after you are gone

Accordingly, each bucket – ؘwith its own distinct goal, time horizon and investment requirements – will react differently to changing market conditions, thus requiring you to take different actions in each.

With uncertainty still ahead, review each bucket to pinpoint opportunities (and vulnerabilities) to help keep on track your long-term plans for yourself, your family and your community. Here’s how.

Access cash when you need it

A “liquidity bucket” of assets provides you with ready access to the operating funds you/your family will need for the next several years to:

• Cover your/your family’s month-to-month living expenses
• Pay for large expenditures, such as capital calls, real estate purchases or tax payments
• Take advantage of unexpected investment opportunities
• Provide a psychological safety net

This bucket is your “sleep at night” money.

It includes actual cash in your safe, deposits, money market accounts and short-duration fixed income (bonds). It also can include securities-based lines of credit or equity in a home (accessed through home equity lines of credit, for example).

Moves you might consider making now

With interest rates higher today than they have been for more than 10 years, implementation matters:

• Identify the appropriate amount of cash: Be clear about your primary liquidity needs, and move excess funds to your lifestyle and legacy buckets
• Use short-term investment vehicles: A short-duration bond strategy can help you enhance yield, keep funds readily available and avoid significant market risk for near-term goals
• Lock in today’s higher yields before rates fall: The turmoil in banks make it more likely that the Federal Reserve is at the end of the hiking cycle. Thus, you may consider locking in the yield on a municipal bond rather than rolling over T-bills, given the potential for capital appreciation when interest rates eventually fall
• Borrow from a line of credit or home equity loan: Despite slightly higher borrowing costs, bridge lumpy or unexpected cashflows and avoid having to sell longer-term investments, which may force you to realize capital gains or reduce market exposure at inopportune times

Maintain your lifestyle

Regardless of what happens this year (e.g., if you retire, experience a large loss of capital in a business or concentrated investment, suddenly find yourself unable to work), your lifestyle bucket should provide long-term financial security for:

• You: Food and dining, clothes and other luxury items, real estate carrying costs and household staff, travel, ongoing large purchases (i.e., the nuts and bolts of daily life)
• Your family: Ongoing gifts to family members, tuition for children and/or grandchildren, wedding expenses, upkeep of the family’s summer home
• Your community: Gifts, such as donations to your alma mater or religious organization, or other philanthropic commitments that you consider part of your ongoing lifestyle expenses

Think of this bucket as a lockbox, holding all the financial resources you need to set aside – and invest appropriately – to meet your and your family’s highest priority spending needs and wants over the course of your lifetimes.

In contrast to a liquidity bucket, a lifestyle bucket contains mid- and long-horizon financial and investment strategies, including stocks; mid- and longer-duration fixed income (bonds); cash to regularly replenish the liquidity bucket; and diversified alternative investments, including private equity and hedge funds.

Moves you might consider making now

Make sure your assets are working well together as the economic environment changes:

• Revisit fixed income allocations: Now that interest rates are higher, bonds once again are an attractive investment opportunity. Add longer-duration vehicles for portfolio diversification, attractive yields and the potential for capital appreciation
• Evaluate equity positions: We believe equity markets are at an attractive entry point following a reset in valuations, though you may want to avoid mega-cap technology stocks in favor of opportunities in U.S. mid-cap and European equities. If you have a concentrated position, understand its potential impact on your plan if it were to move significantly downward
• Maximize tax efficiency: Retain as much of your investment return as possible by harvesting losses, maximizing contributions to tax-deferred accounts, and placing high-return and ordinary-income investments in tax-advantaged accounts
• Consider tax-aware borrowing: Yes, higher interest rates have made mortgages more expensive. However, projected returns also have increased and could still outpace the cost of debt. In this environment, excess equity in real estate may be a source of investment capital, and if structured appropriately—can create opportunities for interest-rate deductions not available with standard mortgage financing

Consider your legacy

By definition, legacy assets are not the ones that support your lifestyle – although they can be a source of additional funding (via a sale or loan, for example) if you need to replenish your lifestyle bucket at a future date.

This bucket holds the assets you want to use to provide for others (your family or favorite charities), typically well into the future. Given the longer time horizon of a legacy bucket, this is where to consider assigning your highest-risk, most illiquid assets.

Quantifying a legacy bucket can help you clarify the details of your goals for these assets. Who do you wish to benefit beyond yourself or your lifetime? When – and under what conditions – should these beneficiaries receive assets? What impact do you want your assets to have on your family and community?

Legacy goals can be achieved in many ways, including with life insurance, irrevocable gift trusts, complex wealth structures, general investments, real estate, art, jewelry and more. Similarly, philanthropic gifts can be made via donor-advised funds (DAFs) or family foundations.

Moves you might consider making now

Given attractive entry points and currently generous U.S. tax laws, you may want to consider putting your excess wealth to work now:

• Take advantage of lifetime estate and gift tax exemptions: The lifetime exemption is currently $12.92 million for individuals ($25.84 million for married couples), but is set to decrease in 2026, to about $7 million per person. Consider gifting assets with growth potential (including interests in a privately held business) now, before a rebound occurs. This way, growth that occurs will be off your balance sheet

• Review life insurance policies: Determine whether your existing policies are still on track to accomplish their purpose—or if market volatility has depleted their cash value, thereby putting the policies at risk. Many people with illiquid estates use life insurance to help pay estate taxes. Or they find it beneficial for wealth transfer purposes, as a non-correlated, tax-efficient asset class. Review ownership and beneficiaries to ensure that the policy is as tax-efficient as possible

• Invest for the long term: Even if there’s a recession later this year, we still believe the current market has one of the best entry points for investment portfolios in the last decade. We expect new equity market leaders to emerge in sectors such as U.S. Small-Mid Cap and Dividend Growth, creating opportunities for long-term investors

We can help

Knowing the purpose for your wealth and aligning your portfolio with these goals can help you stay on track – and respond to opportunities as markets gyrate. Your J.P. Morgan advisor can help you tailor your wealth plan to your specific aims and requirements.

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