In ice hockey, there’s a famous quote attributed to star Wayne Gretzky that a good player should aim to, “Skate where the puck is going to be, not where it has been.”

Where have things been for investors? For the past two years, they’ve enjoyed a good environment for allocating to cash, and these holdings have grown larger than usual. But the interest rate “puck” is about to move, and we see lower rates and returns on cash on the horizon.

Investors need to look ahead now to where interest rates are likely going in 2024 and beyond – and consider pivoting away from surplus cash holdings.

To be fair, it was sensible to have larger-than-usual cash holdings in the post-pandemic period. The most aggressive interest rate hiking regime by the Federal Reserve in a half-century – along with notable moves by other global central banks to raise rates – resulted in cash returns being more attractive than they had been in many years.

But cash’s trajectory is changing. We believe the Fed will soon embark on a rate-cutting cycle. So where should you consider aiming next, in what’s likely to be a falling rate environment? How might you reinvest maturing Treasury bill or money market holdings in 2024?

For investors to position their investment portfolios to meet long-term financial goals, now is the time to do a health check and think about:

• Sizing your surplus cash position
• Getting back into equities and core bonds
• Incorporating alternatives, if eligible
• Ensuring your portfolio is cost-sensitive and tax-aware

Sizing your surplus cash position appropriately

We think interest rates have peaked. We expect yields are likely to drift lower this year as central banks around the world begin to take action and lower rates.

This means staying in cash could potentially adversely impact your long-term financial goals. Inflation has eased, and we expect that overall trend to continue. But inflation is still tangible and eroding the value of cash holdings.

With interest rates expected to come down in the quarters ahead, you may want to consider what the right amount of cash ought to be for your wealth plan. If you are holding surplus cash for your short-term needs, you should consider reducing your cash balances now and locking interest rates that match your time horizon and liquidity needs.

Historically, bonds have outperformed cash holdings in the years immediately following a pause in the Fed’s rate-hiking trajectory (see below). And we believe we’re in this pause period, with cuts that may follow soon – creating more opportunities to put your excess cash to work to help you reach your longer-term goals.

Getting back into equities and core bonds

With equity markets recently reaching all-time highs, investors could be forgiven for wondering how long this bull run will last. But we remain optimistic. It’s also worth noting that historically in the U.S. equity market, all-time market highs are often followed by further all-time highs (see below). This is no guarantee of future performance, of course, but historically these patterns tend to repeat as economies and companies grow.

Once you’ve sized your cash holdings appropriately for your short-term liquidity needs (or for a psychological safety net), you may want to consider how you could potentially grow your wealth at a better rate over time. Moving some cash into equities may help you reach your goals more effectively. Right now, we are particularly focused on three key equity sectors: technology, health care and consumer discretionary.

You may also want to look at your core bond holdings, as they can still provide solid ballast. Because we expect yields on investment grade bond portfolios heading lower in upcoming quarters, you may want to think about rotating into high-quality bonds now to lock in yields at healthier levels.

Incorporating alternatives for their diversifying power and return potential

After 2023’s spectacular “everything rally” (when the U.S. stock market soared and bonds made a comeback), this year may be an opportune time for investors to harness the diversifying power – and potential outperformance – associated with private markets.

Private markets are so varied, we suggest taking a diversified approach to allocating capital to alternatives. Diversifying by asset class and strategy makes sense, but so does diversifying by vintage year, or year of fund inception. This approach, which spreads investment risk across time, also allows investors to lean into market opportunities. It’s an approach that can be particularly powerful when specific strategies appear poised for potential outperformance. But it’s important to remember that investing in alternatives often involves a greater degree of risk than investing in traditional assets. For instance, they are typically not registered with regulators and may therefore offer limited information to investors. Additionally, alternatives often carry a risk of illiquidity as a result of restrictions on transfer and lack of a secondary trading market.

Looking ahead, we see compelling opportunities arising this year in private equity, private credit and infrastructure, with private credit likely to be a primary focus.

Ensuring your portfolio is cost-sensitive and tax-aware

As you consider realigning your portfolio allocations to your long-term financial goals, make sure that your approach is cost-sensitive and tax-aware.

Active management – highly informed and selective stock picking – can offer an opportunity to generate competitive returns, but often at a higher cost. Knowing where to use active management in your portfolio is paramount to keeping it cost-efficient.

Similarly, being tax-aware as you review your portfolio in 2024 can help you keep more of what you earn. Investors who are keen to reinvest in equities now may want to consider investing in tax-smart separately managed accounts.

We can help

Now is a good time to review your long-term wealth plan and consider whether you may be holding more cash than necessary to achieve your long-term goals. We encourage clients to “skate where the puck is going” rather than staying in cash. For a comprehensive health check of your investment portfolio, reach out to your J.P. Morgan advisor today.