Sitting on Too Much Cash? Here's What to do With the Extra...
When you’ve built up a surplus of cash, it’s hard to feel like you’re doing anything wrong. After all, a surplus is indicative of a frugal lifestyle built on a foundation of spending less than you earn. Who could criticize that?
But money is more than just a resource you need to stock up – it’s a tool that can create even greater wealth if used correctly. In other words, money that’s just sitting around is a wasted opportunity.
There are plenty of things you could be doing with that extra cash that are low-effort and low-risk. If you’re ready to get your money working for you, consider these options.
How Much to Keep on Hand
You’re going to hear varying numbers here, but you should aim to keep six month’s worth of your must have expenses as an emergency fund (think rent, mortgage, utilities, groceries, insurance, and essential items you’ll definitely need to pay for no matter what). That amount will cover you in case you lose your job, face a prolonged illness or have to take time off work to care for an ailing relative. If you work for yourself or have children, you might consider saving a year’s worth of expenses just in case.
Any cash you’ve tucked away for an emergency account should be kept in a high-interest savings account. A savings account is the perfect tool for this because it’s liquid enough that you can access it within a couple days, but not located in the same checking account you use for daily purchases. You can use the same bank you use for your checking account or another if it offers a better rate.
A high-yield savings account will usually earn you around 1% interest a year if you’re lucky. That amount won’t match inflation, but it’s better than a checking account paying nothing.
Why Keep It Elsewhere
You risk losing money when you store excess cash in a checking account or under your mattress. Money’s like a plant – it can only grow if it’s kept in the right environment.
The longer you keep cash somewhere it’s not growing, the more you lose due to inflation. That means if you keep $1,000 in a checking account that’s not earning interest, it’s worth less every year.
Think of your money as an opportunity. The choice of whether to waste or seize that opportunity is entirely up to you.
It’s important to note though, that while you want to maximize the amount of interest you earn on your emergency fund, this is one chunk of money that for your financial planning purposes, isn’t meant to be invested or utilized in any way that could lose your principal balance. This emergency fund is meant to be available in case of emergencies, and last I checked, we don’t know when those will happen. There is an opportunity to earn more growth and income when deploying additional funds into savings accounts for retirement.
Other Savings Goals
Cash you’re saving for things you’ll need in the next three to five years doesn’t need to be kept in a savings account.
One popular option for short-term savings goals is a CD that will mature in a few years. A CD is insured by the bank and has a specific time in which you hold it. Rates will vary based on the bank you choose, how much you can deposit and where you live. You can compare rates online at Bankrate or NerdWallet.
Money market accounts are another option if you won’t need the money for a couple years or more. Some have higher rates than savings accounts and are also backed by the FDIC. Bonds are another option, but rates vary depending on when they mature and how the economy is doing. Your best bet is a CD or money market for short-term goals.
Invest the Rest
Once you’ve allocated money for your emergency fund and short-term savings goals, it’s time to invest any remaining funds for retirement. This money should be deposited in an IRA, 401k or other long-term savings vehicle. These accounts can provide a much greater return because you won’t have to access them anytime soon.
Popular options for retirement savings include index funds or target-date funds, most of which have low fees and decent returns. A financial advisor or planner can help you pick a fund if you‘re unsure which to go with.
Bottom line, if you’re sitting on more than six months worth of expenses in cash, it’s time to get a plan in place for how to allocate the rest in order to ensure your money is being put to work for you.
Building a Better Index With Strategic Beta
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF at J.P. Morgan Asset Management
With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in, says Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies at J.P. Morgan Asset Management and Lead Portfolio Manager of JPMorgan Diversified Return International Equity ETF (JPIN).
Not all diversified portfolios are alike
In their search for diversification, many investors turn to passive index ETFs, which track a market cap-weighted index. But these funds aren’t always the most effective way to steer a steady course through volatile markets—and there are two key reasons why.
First, traditional market cap-weighted indices are actually less diversified than investors may think. For example, in the S&P 500, the top 10% of stocks account for half the volatility of the index. Within sectors, while you might assume that sector risk is distributed across the ten major sectors fairly evenly, it is a surprise to many that at any point in time, one sector can be as high as 50% of the risk.
Second, cap-weighted indices come with some inherent weaknesses, including exposure to unrewarded risk concentrations and overvalued securities. So, while these indices provide investors with exposure to the equity risk premium and long-term capital growth, as is the case with any other investment, investors can also experience painful downturns, which increase volatility and reduce long-term performance. For investors seeking equity exposure with broader diversification—and potentially lower volatility—strategic beta indices may be better positioned to deliver the goods.
How do we define strategic beta?
Strategic beta refers to a growing group of indices and the investment products that track them. Most of these indices ultimately aim to enhance returns or reduce risk relative to a traditional market cap-weighted benchmark.
Building on decades of proven research and insights, J.P. Morgan’s strategic beta ETFs track diversified factor indices designed to capture most of the market upside, while providing less volatility in down markets compared to a market cap-weighted index. Rather than constructing an index based on market capitalization—with the largest regions, sectors and companies representing the largest portion of the index—our strategic beta indices aim to allocate based on maximizing diversification along every dimension—sectors, regions and factors. The index therefore seeks to improve risk-adjusted returns by tackling the overexposure to risk concentrations and overvalued securities that come as part of the package with traditional passive index investing.
So, how do you build a better index?
As one of just a few ETF providers that combine alternatively-weighted and factor-oriented indices, our disciplined index methodology is designed to target better risk-adjusted returns through a two-step process.
First, we seek to maximize diversification across the risk dimension. This essentially means that we look to ensure risk is more evenly spread across regions and sectors, which balances the index’s inherent concentrations. As uncontrolled risk concentrations are unlikely to be rewarded over the longer term, we believe investors should strive for maximum diversification when constructing a core equity exposure.
Second, we seek to maximize diversification across the return dimension. Research shows that there are a number of sources of equity returns beyond growth itself. These include risk exposures such as value, size, momentum and quality (or low volatility). When creating a diversified factor index in partnership with FTSE Russell, we seek to build up the constituents with exposure to these factors. We therefore select securities through a bottom-up stock filter, scoring each company based on a combination of these return factors to determine whether it is included in the index. These factors provide access to a broader, more diversifying source of equity returns as they inherently deliver low correlation to one another, providing diversification in the return dimension.
So, whereas traditional passive indices allow market cap to dictate allocations, the diversified factor index seeks to ensure that we minimize concentration to any source of risk—whether it be region, sector or source of return.
How are you currently weighted versus the market cap-weighted index, and how have your under- and over-weights enhanced risk-return profiles?
Crucially, our weightings don’t reflect specific views on sectors or regions and are instead, by design, the point of maximal diversification. It is important to remember that market cap-weighted indices typically carry a lot of concentration risk—for example, at various points in time, a single sector can explain half the risk of the index when left unmanaged. At the moment, three sectors explain two-thirds of the risk of the FTSE Developed ex-NA Index—these being financials, consumer goods and industrials. In contrast, the FTSE Developed ex-NA Diversified Factor Index—or strategic beta index, which JPMorgan Diversified Return International Equity ETF (JPIN) tracks—is explicitly designed to maintain balance and therefore these sector allocations range from 8% to 12%. In the short term, any concentrated portfolio can of course outperform a more diversified one, if the concentrated bet paid off.
Investing wholly in a single stock may outperform over short-term periods. At other times, it may significantly underperform an index. However, it is well understood that an investor is better off diversifying across lots of stocks for better risk-adjusted long-term gains. The same applies here. From a pure return perspective, if financials, for example, account for half of a cap-weighted index in terms of market cap and have a strong run over the short term, of course, this index would outperform over this period. Over the long run, however, it is fairly uncontroversial to suggest that the more broadly diversified index could achieve better risk-adjusted returns.
Seeking a smoother ride in international equity markets?
For investors targeting enhanced diversification through a core international equity portfolio, JPMorgan Diversified Return International Equity ETF (JPIN) targets lower volatility by tracking an index that more evenly distributes risk, enabling them to get invested—and stay invested.
Learn more about JPIN and J.P. Morgan’s suite of strategic beta ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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