What Is Dead Money?
Dead money is a slang term for any investment that has shown little or no growth over 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 has shown little increase in value, or that is locked up for a long time with little yield.
- Dead money in a single investment can be a source of performance drag for an investor's entire portfolio.
- Many investors aim to identify dead money in their investments and trade them in for higher-return choices with the same level of risk.
- Dead money could be money stashed in a mattress, a non-interest–yielding checking account, or a stock with a price that has stalled.
- 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.
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.
Types of Dead Money
Dead money is actually used to describe many different types of investments.
Although most people would not immediately consider cash to be dead money, if you hold onto cash in its physical form, perhaps under a mattress or in your dresser drawer, you will have the same amount of money at the end as you had at the beginning of the period. In fact, depending on inflation, holding cash can be worse than dead money because, depending on how long you hold onto it, its purchasing power could actually significantly decrease.
"Bad" Dead Money
"Bad" dead money is dead money in the most traditional sense. Bank of America is one example of "bad" dead money. Prior to 2007, many investors expected that the company would experience profitability in the future. However, when the company's earnings rapidly declined, so did their share prices.
"Overvalued" Dead Money
Sometimes when investors refer to dead money, they are really referring to a valuable company that they paid too much for. A historical example of this is Wal-Mart; at the turn of the millennium, Walmart's shares were trading at over forty times the company's earnings.
"Good" Dead Money
Some types of dead money can actually be beneficial. This is because when some investors refer to dead money, they are referring to a short-term time horizon. A historical example of this is IBM. In July 2011, shares of IBM were priced in the mid- $180s. Three years later, shares of IBM were the same price. However, IBM grew as a company during that time. So, to consider it a poor investment may not be accurate.
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.
While dead money is often thought of as a poor investment, in reality, it could be an opportunity to buy at a lower valuation.
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
The world of finance is rarely black and white. 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.
It's also true that a particular investment made for one purpose by one investor is made for a completely different reason by another investor. This makes it hard to identify exactly what is a dead money investment. A good investment for one investor may be thought of as incredibly foolish for another investor. 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.
Although many investors may rely on investment analysis from financial firms to identify what stocks they should invest in and what stocks are dead money, it's important to keep in mind that the reasons for changing the rating of a stock may have nothing to do with your personal investment goals.
Examples of Dead Money
One historical example of dead money is Sirius XM Holdings, which reached an all-time low of $0.12 in December 2008 and did not climb back to $1 until February 2010. However, this dead money did eventually make a gradual recovery, and it was trading at a little under $6 per share in May 2021.
According to an analysis of data from S&P Global Market Intelligence and MarketSmith, the Investors' Business Daily has predicted that some stocks that soared to new heights in 2020 will be dead money in 2021. One of these companies is the materials company Albemarle. In 2020, Albemarle's shares made gains of 90%.
However, Albemarle's IBD Composite Rating is just 79, which means that 21% of the market's other stocks have better fundamentals and technicals. In keeping with this assessment, analysts think that Albemarle's stock got ahead of the company's actual valuation and will be 22% less by December 2021. Analysts made similar predictions about the communications services company, Twitter, and the industrials company, Rollins.