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.
Key Takeaways
- 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 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 also be cash held at home or in an account that doesn't earn interest.
- 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 adiversifier of other investments.
Types of Dead Money
Dead money is used to describe many different types of investments.
Cash
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 actually could decrease significantly.
"Bad" Dead Money
"Bad" dead money is dead money in the most traditional sense. Bank of America during the Great Recession 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—sliding from $39.7281 to $3.0293 (a level last seen in 1991).
"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 Walmart; 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. For instance, Walmart may have looked like dead money during the early 2000s, when prices hovered around $35 for years. Investors with a short time horizon then would have missed out on the stock's quintupling in value by 2022.
Another historical example of this is IBM. In July 2011, shares of IBM were priced in the mid-$110s. 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, theinvestmentis referred to as a dead money investment. Examples of dead money investments are the sharesof companies that are not considered likely to improve orappreciatepast 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.
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 priceshave 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.
Although many investors may rely on investment analysis from financial firmsto 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
Onehistorical example of dead money isSirius XM Holdings, which reached an all-time low of $0.12 in December 2008 and did not climb back to $1 until February 2010. This dead money did make a gradual recovery until it was trading at a little under $6 per share in May 2021. By April 2023, it had fallen to $3.84.
"Dead money" proclamations aren't always accurate. According to an analysis of data from S&P Global Market Intelligence andMarketSmith, the Investors' Business Daily predicted that some stocks that soared to new heights in 2020 would be dead money in 2021. One of these companies is the materials company Albemarle. In 2020, Albemarle's shares made gains of 90%. Analysts thought that Albemarle's stock got ahead of the company's actual valuation and would be 22% less by December 2021. Instead, the stock price rose more than 300% over the next two years.
Analysts made similar predictions about the industrials company Rollins, which did remain flat, as well as the communications services company Twitter, Inc. Twitter, Inc. went private in 2022 when it was bought by Elon Musk and eventually renamed X Corp.
Is It Bad to Have Dead Money?
Many money managers believe their top priorityis to avoid putting their clients into dead money investments. They consider money to be atool that has towork for an investorevery 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.
How Do You Identify Dead Money?
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 ifa 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.
What Is Dead Money in the NFL?
When an NFL team releases a player from a contract but still owes that player guaranteed cash and bonuses, it is considered dead money. The money still must be paid even though the player is no longer a member of the team, and this can affect salary caps for upcoming seasons.
The Bottom Line
Typically, dead money is considered to be money that isn't earning a return. While dead money can drag down the performance of your portfolio whether it's held in stocks, cash, or some other format, there can be advantages. Dead money in the form of cash can serve as a hedge against volatility, while dead money stocks can yet revive themselves in the future if the company changes tack. Whether an investment is dead money depends at least somewhat on the individual investor and their goals.
