This is the cost of carrying too much cash, according to Wells Fargo

Americans’ love affair with cash may be costing them in the long run, according to Wells Fargo. The bank believes “the time may have come” to start pulling money out of cash vehicles like money markets, high-yield savings accounts and other short-term instruments. A record $6.42 trillion is sitting in money market funds, as of Wednesday, according to the Investment Company Institute . While it has been a great place to park cash and earn attractive yields, those rates are coming down now that the Federal Reserve has started cutting rates. The seven-day annualized yield on the Crane 100 list of the 100 largest taxable money funds is currently 4.75%. The last time funds yielded less than 5% was July 2023, according to Peter Crane, founder of Crane Data, a firm that tracks money markets. The yield was 5.2% in November, the highest since Crane started tracking yields in 2006, although they were over 6% for a period in 2000-2001 and in the high teens in the 1970s, he said. The move in money market fund yields typically lag federal funds rate cuts. It usually takes about a month to fully digest Fed moves, Crane said. That delay is attractive for institutional investors. During Fed rate decreases, direct money market investments, like Treasury bills, will absorb the cuts quicker than money market funds. “Of course, so much cash is coming in so fast that the rates will drop faster,” Crane noted. “The new cash must be reinvested at the new lower levels, but T-bill, repo [repurchase agreement] and CD investors are flocking to MMFs while they still hold some of the older, higher yielding stuff.” However, investors need to make sure they are the right amount stocked away in cash. Those in cash vehicles will see reinvestment risk, or the lost opportunity to reinvest future cash positions at the current rate of return, Wells Fargo global investment strategist Michelle Wan said in a note last week. “A long-term risk of relying on money market funds as a sizable allocation is the cash drag over our strategic time horizon,” she said. “Over time, riskier assets have outperformed cash and cash-alternative vehicles.” The bank compared the growth of $1 million since 1926 and found that small-cap equities rose the most, to $62 billion, followed by large-cap stocks at $21 billion growth. One to 3-month Treasury bills, a cash alternative, rose to just $24 million over the same period, Wan said. That said, she doesn’t advocate chasing a higher rate of return by moving cash into a higher-risk asset. Instead, she suggests allocating across asset classes. “We believe a diversification strategy offers a blend of growth potential and risk-management provisions for investors with a strategic time horizon,” Wan said. “In past corrections, the S & P 500 Index has had a larger drawdown on average (from peak to trough) compared to a diversified allocation.” Investors should review their long-term return expectations and risk tolerance, and then consider dollar-cost averaging into a diversified allocation strategy that is suitable for their long-term goals, she advised. For the fixed income portion of the portfolio, Wells Fargo has been suggesting high-yield bonds as a place to move some short-term investments. They have since gotten expensive, so it now believes investors should take advantage of any pullbacks to reposition allocations. When it comes to the interest-rate curve, U.S. intermediate term taxable fixed income is attractive, said Brian Rehling, head of global fixed income strategy. “We view these maturities as a nice compromise between the declining yields that will be experienced in shorter maturities and the potential price volatility in longer-dated maturities,” he said.