Dead Money

Dead money is an investment with low or negligible growth over time. It is a slang term indicating money stuck in an investment or poker to define money at stake and will only go to the winner. Dead money may reap no considerable benefits or earn any interest for a long time.

Market analysts use the term to inform investors of the stocks with low or no growth if they plan to purchase them. Investors tend to identify and replace such stocks with other high-return investments, as a single dead money investment can negatively impact a portfolio's performance.

Key Takeaways                                                               

• Dead money is a slang term for investments with no growth and minimal return.
• In general, savings kept at home or in interestless accounts can also be considered dead money.
• Investors occasionally tend to hold such investments in anticipation that they will revive and become profitable. It is also referred to as sunk cost fallacy.
• Many market traders observe dead money as a good opportunity to buy stocks when they are undervalued and then wait for a long time.

Dead money represents static investments and refers to those stocks that have been trading on a particular price bracket for a long time and hence have offered little or no growth to the investor. As per economics, with time, certain factors affect the purchasing power of money, like market conditions, inflation, demand, supply, etc. When a certain amount of funds has been kept in physical form or invested in a dead money stock, it has not grown over time, ultimately making it far less valuable.

In the stock market, many investors tend to keep these money stocks, anticipating that they will turn around. However, it is not highly suggestive as, with time, many other high-potential stocks can be explored. There is also a factor of opportunity cost, the profit from a different stock that an investor declines while invested in such money stock. In modern finance, it is advised that people should not keep their money saved at home or in bank accounts, and with wise investing, every single investment can reap good benefits for an individual in the long run.

Many financial products and securities are considered dead money periodically as they bounce back occasionally, but their prices often remain stagnant, like gold. A stock trading at a certain price for a long time can show overnight growth resulting from a new project, news, or market rumor; it is only a matter of perspective, time, opportunity, patience, and risk appetite. Most investors have dead money in their portfolios, intentionally and unintentionally, looking for the right time to exit, switch, or replace the investment.

There are primarily four types of dead money -

1. Good - Investors use this term when the stocks bounce back, eventually offering reasonable returns, although it may take time, and investors must be patient. It refers to a short time horizon. If people had exited the stock earlier, they would never have garnered the returns.
2. Bad - Such money is realized in extreme scenarios such as a financial crisis or economic recession when investors believe the company will revive. Still, the stock price keeps decreasing rapidly, bringing heavy losses to the market and investor portfolios.
3. Overvalued - In this scenario, investors had bought an overpriced share typically when the market was making a bull run. Later, the stock price declined, and the investment became dead money. Although it is a notional loss, an investor can wait for the prices to rise or exit the stock registering a loss.
4. Cash - It refers to the money people keep in physical form saved in their homes, under mattresses, inside books, or in safety lockers. As per economics, such money does not reap any benefit, and with time, its purchase power declines as inflation increases.

Below are two simple examples of dead money; one is a hypothetical scenario, whereas the other is a real-world situation -

Example #1

Suppose Arthur is an ace investor with multiple stocks in his portfolio. Though his overall performance and return of Arthur are good, a particular banking stock has been stagnant for more than three years. At first, Arthur believed that the stock would eventually grow and reap good returns and did not exit from the stock position. But lately, he realized that during this period, the money invested in that particular stock is stagnant without any growth, and therefore, it has generated no profit.

Arthur could have used the money by exiting the stock at a minimal loss or break-even value and investing in some other stock, mutual funds, or even a fixed deposit that offered him reasonable returns over the next few years. In this example, the banking stock is dead money for Arthur. The bank grew in operations and revenue, but its stock price remains stagnant.

Example #2

In March 2023, there was a wave of fear among American investors who believed that rising inflation and higher yield rates would make the US stocks dead money. Although stocks have hiked during the period, a community of investors was worried that the prevailing market conditions coupled with rising interest rates and inflation could negatively affect US equities.

The managing director of Credit Suisse, Jonathan Golub, explained how the perpetual rising inflation impacts companies' profit margins. A six-month yield guarantees a 5.25% variation, and the investors at least get a risk-adjusted return of 1% to 2%. Else, the stocks are dead money and are not worth the investment.

The alternatives for dead money are -

• An individual can explore different financial products to earn short-term profit.
• Instead of keeping the money in a bank account, buy assets that offer regular payments.
• Understand that the wait is not worth it and exit the dead money stock and reinvest it in another stock with good returns and equal risk.
• If the investor is planning long-term wealth creation, they can wait for the stock to bounce back.
• Invest in business projects and real estate to explore different financial markets.
• Instead of keeping the money stuck in growth-less financial instruments, individuals can buy things they want to purchase for a long time.