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The Cost of Holding Cash

Last update on: Jun 18 2020

A bull market mantra was “cash is trash,” meaning that investors shouldn’t have any of their portfolios in cash when stocks are rising by double digits each year. That was the mantra even when money market funds were yielding 4% and higher. Now, there’s an even stronger argument to limit your cash holdings. Money market funds charge fees, and in not a few cases those fees are higher than what the same mutual fund company charges on some of its equity funds. This piece in Fortune for example demonstrates that Fidelity’s fees on the money market fund offered to 401(k) plans are about three times the fees charged on its S&P 500 Index fund for 401(k) plans. The stock fund has about a 1.9% dividend yield, compared to the 0.10% yield on the money market fund.

Of course, there are differences. The index fund is far more volatile in value than the money market fund. Also, managing the index fund probably takes considerably less work than managing a money market fund in today’s climate. Fees matter, but they aren’t the only thing that matters. When you have strategic or practical reasons for holding cash in a money market fund, the fees are the cost of meeting your goals. In the March issue of Retirement Watch I discuss the options for people who seek higher returns on their safe cash without significantly increasing their risk.

A Fidelity spokesman responded to the criticism by highlighting the research costs associated with money market funds, especially amid European debt worries. “Fidelity has long made a significant investment in its money market research capabilities,” says spokesman Adam Banker. “Fidelity’s research team makes its own independent minimal credit risk determinations on every issuer or security in the money market funds.”

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