What Is Dead Money?
Dead money is a slang term for any investment that has shown little or no growth in its return to investors in a protracted period of time. It may also refer to money that is locked up in an investment that has little yield. Analysts sometimes label a stock as dead money as a warning to investors who might consider purchasing shares.
Dead money in a single investment can be a source of performance drag for an investor's entire portfolio.
- Dead money is an investment that is showing little increase in value, or that is locked up for a long time with little yield.
- Many investors aim to identify dead money in their investments and trade it in for higher-return choices with the same level of risk.
- One investor's dead money can be another's safe choice.
Understanding Dead Money
Investments that are returning insufficient growth or income are known as dead money. It could be money stashed in a mattress, a non-interest–yielding checking account, or a stock with a price that has stalled.
Cash is often considered to be a drag on an investment portfolio since it earns little or no interest and may even lose real buying power due to inflation.
"Cash drag" can hurt the performance of a portfolio. Many portfolios would earn a better return if all available money was invested in the market. However, some investors decide to hold cash to offset risk, prepare for opportunities, pay account fees and commissions, or serve as a diversifier of other investments.
Dead Money in Stocks
Some investors will hold a stock despite a series of price drops, hoping that it will turn around and earn back some of its lost value. However, if the investment is dead money, the likelihood of a turnaround is low, and it might be wiser to sell the shares before incurring additional losses.
When an investor invests in stocks, they expect them to yield profitable returns—unless they don't. If they don't, the investment is referred to as a dead money investment. Examples of dead money investments are the shares of companies that are not considered likely to improve or appreciate past their current price.
Many money managers believe their top priority is to avoid putting their clients into dead money investments. They consider money to be a tool that has to work for an investor every single day.
Some conservative investors might take a different view. A stock that doesn't move much in either direction can be a safe haven in a time of turmoil.
Identifying Dead Money
One investor's dead money could be a future gold mine for another investor, quite literally. Gold prices have had extreme ups and downs in trading for over a century. Periodically, they have been considered dead money. Each time, a few traders could foresee a financial crisis ahead and bought gold stocks when they were dirt cheap. These stocks proved to be a great hedge against falling stock prices.
Many traders apply the term "dead money" only if a given position drops more than 80% in value and then shows little or no price bounce. The security may sit at these extremely low levels for years.
One past example of dead money was Sirius Satellite Radio, which reached an all-time low of 12 cents in December 2008 and did not climb back to $1 until February 2010. However, this dead money did eventually make a gradual recovery and was trading at over $6 a share in March 2021.