You are missing something (but don't worry, it is good to brainstorm like this).

At maximum speed (maximum energy storage) you want every part of the flywheel to be about to break. By introducing a non-structural material (liquid water), you have added mass but not the strength to get to higher speeds.

Imagine filling a bucket with water and spinning it around your body. All of the force to keep the bucket from flying away has to be held by the handle of the bucket. A better bucket flywheel would be all handle... Hopefully someone else can give you a better analogy.