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.
Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies, J.P. Morgan Asset Management
A quiet revolution is taking place in the alternatives world. The idea of alpha/beta separation has finally made its way from traditional to alternative investing. This development brings with it a more transparent, liquid and cost-effective approach to accessing the “alternative beta” component of hedge fund return and a new means for benchmarking hedge fund managers.
The good news for investors is that the separation of hedge fund return into its components—rules-based alternative beta and active manager alpha—has the potential to shift investing as we know it. These advancements could democratize hedge funds and, at long last, make what are essentially hedge fund strategies available to all investors—even those who aren’t willing to hand over the hefty fees often associated with hedge fund investing.
A benchmark for alternatives
With respect to traditional equity investing, we have long accepted the idea that there is a market return, or beta—but this hasn’t always been the case. Investors used to assume that to make money in the stock markets, one needed to buy the right stocks and avoid the wrong ones. The idea of a market return independent of skilled stock selection seemed ridiculous to most market participants. Yet today, we would never invest in an active manager’s strategy without benchmarking it against its respective beta.
Interestingly, hedge fund managers have been held to a different standard. Investors have been much more willing to accept the notion that hedge fund strategy returns are pure alpha, and that their investment returns are based entirely on the skill of the fund manager. That notion explains why investors have been willing to accept a “two and twenty” fee structure just to access what has been perceived as one of the most sophisticated and powerful investment vehicles available.
In thinking about the concept of beta, consider its precise definition—the return achievable by taking on a systematic exposure to an economically compensated risk. In traditional long only equity investing, the traditional market beta has been further refined as a number of other risks have been identified that are commonly referred to as “strategic beta.” These include factors such as value, momentum, quality and size. But no one ever said that these risk factors must be long-only.
Over the past decade, as more hedge fund data became available, academics began to disaggregate hedge fund return into two components: compensation for a systematic exposure to a long/short type of risk (alternative beta), and an unexplained “manager alpha.” What they found is that a significant portion of hedge fund return can be attributed to alternative beta. That fact has turned the tables on how we look at hedge fund return. With the introduction of the alternative beta concept, hedge fund managers will have to state their results, not just in terms of total return, but also as excess return over an alternative beta benchmark.
Merger arbitrage—an alternative beta example
The merger arbitrage hedge fund style can be used to illustrate the alternative beta concept. In the case of merger arbitrage, the beta strategy would be the systematic process of going long every target company, while shorting its acquirer. There is an inherent return to this strategy because the target stock price typically does not immediately rise to the offer price upon the deal’s announcement. This creates an opportunity to purchase the stock at a discount prior to the deal’s completion. The premium that remains is compensation to the investor for bearing the risk that the deal may fail.
Active merger arbitrage managers can add value by choosing to invest in some deals while avoiding others. Therefore, their benchmark should be the “enter every deal” strategy, not cash. In fact, the beta strategy explains the majority of the return to the average merger arbitrage hedge fund. And it doesn’t stop there. Other hedge fund styles that can be explained using alternative beta include equity long/short, global macro, and event driven. Note that the beta strategy invests in the same securities, using the same long/short techniques as the hedge fund strategy. The difference is that the beta strategy is a rules-based version that can become the benchmark for the hedge fund strategy. After all, if a hedge fund strategy cannot beat its respective rules-based benchmark (net of fees), an investor may be wiser to stick to the beta strategy.
Implications for investors
What does all this mean for the end investor? Hedge funds have traditionally been the domain of sophisticated investors willing to pay high fees and sacrifice liquidity. Alpha/beta separation in the hedge fund world means that investors can finally choose whether to buy the active version of the hedge fund strategy or opt for the passive (beta) version. Hedge fund strategies can be effective portfolio diversifiers. Now, through alternative beta, virtually all investors can access what are essentially hedge fund strategies in a low cost, liquid, and fully transparent form. For investors who haven’t had prior access to hedge funds, this could be welcome news. Not only can investors look at an active hedge fund manager’s strategy and determine how it has done compared to the systematic beta equivalent, they can also invest in ETFs that encapsulate these systematic strategies.
When looking at one’s traditional balanced portfolio today, there are plenty of questions around whether the fixed income portion will achieve the same level of diversification it has provided in the past. After all, with yields still low, there is little income return. Additionally, the capital gains that came from interest rate declines are likely to reverse. With fixed income unlikely to adequately fulfill its traditional role in portfolios, there is a need to find an alternative source of diversification. This is where alternative strategies may help. For investors seeking to access diversifying strategies in liquid and low-cost vehicles, alternative beta strategies in ETF form are one option.
Looking for an alternative to enhance diversification in your portfolio?
For investors looking to further diversify their overall portfolio, JPMorgan Diversified Alternatives ETF (JPHF) seeks to increase diversification and reduce overall portfolio volatility through direct, diversified exposure to hedge fund strategies using a bottom-up, rules-based approach.
Learn more about JPHF and J.P. Morgan’s suite of 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.
- 1 of 1123