How to manage cash in a bull market

A bull market – defined as a sustained period of positive market prices and investor sentiment – has the potential to provide good conditions to grow your wealth. But as much as investors stand to benefit when markets are positive, bull markets also present some strategic challenges, particularly in terms of holding or investing cash.

Of course, it’s not possible to predict with absolute certainty where markets may be headed. But after a long series of interest rate hikes designed to fight inflation, the Federal Reserve appears poised to cut interest rates at some point this year. When interest rates move lower, borrowing becomes cheaper, which can boost economic activity and drive stock prices higher.

When it comes to the fact that interest rates can go up or down, impacting the markets around them, it’s worth considering how you can optimize your investments and finances. In a time of interest rate cuts, investors might want to employ certain strategies. For example, one area where interest rate cuts can typically make a difference is on your cash holdings, as the yield you earn on money in savings accounts and other deposit products can fall along with interest rates.

Luckily, a case of declining interest rates often coincides with opportunities to invest in stocks and other assets – but you would still need cash on hand to pay for your expenses and cover any possible emergencies. Here are some tips for managing your cash allocation during a bull market.

Let FOMO be your guide

When you’re thinking about the latest device or hottest travel destination, fear of missing out – or FOMO – may seem like an overreaction. But in a bull market, FOMO is a legitimate concern. Making the most of a positive run in the markets means investing as much as you can afford in stocks and other asset classes with a likelihood of gaining value.

In a period when the markets are doing well, you may want to limit your cash stockpile as a way of enhancing your growth potential. Allocating too much of your money to cash – especially during a bull market – can jeopardize your ability to meet long-term goals. Bull markets can be appropriate times to engage in buy-and-hold strategies, buying assets that are set to grow in value as the markets push higher. However, you may consider your personal financial situation and risk tolerance when making a decision.

Prepare for lower yields on cash holdings

If the chance to capitalize on growth and advance toward your goals isn’t enough motivation to channel your funds into investments during a bull market, the likely decline in interest rates also means you’ll earn lower yields on any cash deposits you hold in a savings account.

One potential strategy for any funds you decide to keep in cash is a certificate of deposit (CD). This type of account lets you lock in an interest rate for a specified time frame if you agree to leave the money in the account over that period.

Additionally, you can consider investing in bonds, treasuries and other longer-term fixed income investment vehicles, with the of potential of helping your money grow over the long term. J.P. Morgan advisors are available to help with any questions.

But don’t give up on cash entirely

While declining interest rates and potentially higher stock market values can provide a double-edged incentive to explore higher-risk and higher-reward investment opportunities, cash remains a key part of your portfolio no matter what the economic backdrop. After all, it’s important to have liquid and accessible funds on hand to cover your expenses.

As you consider how much cash is necessary and how you can put your cash to work for you, it may be helpful to “bucket” your cash based on various purposes. For instance, you will need cash to pay for everyday expenses as well as in your emergency fund. Beyond that, you may consider holding onto some “sleep at night” cash as an extra cushion against uncertainty, as well as cash earmarked for any big purchases you expect to make soon.

The bottom line

Managing your cash allocation means setting aside the funds you need to cover expenses, emergencies and bigger purchases – ideally without sacrificing opportunities to invest for long-term growth. Bull markets and periods of low interest rates can affect this calculation, with lower yields available on cash deposits and an array of opportunities for profitable investments.

Regardless of the economic conditions, a financial advisor can help you devise a plan to allocate your cash and other assets in a way that can give you a better shot at reaching your goals.

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