How This Year’s Hottest Investment Could End Up Costing You

livemint.com:

Cash has rarely been this hot on Wall Street. Financial advisers warn holding too much can burn a hole in your portfolio. With markets rocky and cash earning 5% or more, investors have boosted their holdings of money-market funds to a near-record $5.6 trillion, according to the Investment Company Institute.

Both individuals and institutional investors are piling in—asset managers now have roughly one-fifth of their portfolios in money-market funds, State Street data show. Cash was trash for years on Wall Street, where low interest rates left investors buying every dip, saying there was no alternative to stocks. The prospect of a prolonged period of higher rates has upended that thinking, buffeting both stocks and bonds while increasing the returns offered by some of the safest, shortest-term investments such as money markets.

Yet many advisers caution that fees, taxes and inflation all undermine those returns. And one of the biggest costs is opportunity: By pouring money into cash, investors miss out on potential gains from holding a broad portfolio of stocks, bonds and other riskier investments. “Money-market funds are a rational place to be for the next six months.

But over the long term, taking risks pays you more," said Wylie Tollette, chief investment officer for Franklin Templeton Investment Solutions. “Keeping any more than a small allocation to cash in your portfolio, for any longer than the short-term, will ultimately cost you thousands or millions of dollars." Though often treated as akin to a bank account, the funds differ from normal savings accounts and other cash-like investments, such as CDs. They typically lend cash to banks overnight (backed by Treasurys), park it at the Fed or invest in Treasury bills