In finance, dead money is money tied up in an investment with little chance of return, and a potential for loss. This slang term has been adopted for general use outside the financial world, where people may talk about “dead money” in terms of money spent with no chance of return. There are a variety of reasons why people may wind up with dead money investments, ranging from making a bad buy to an unexpected development in the market that throws off an investment plan. Such investments can be tricky to get out of without losing more money.
When a stock, fund, or other investment is not generating returns, it may be referred to as dead money, referencing the losses experienced by people with funds tied up in the investment. People are warned of dead money investments by investment advisors and other authorities. This can create a circular effect, as people refuse to invest and pull out of existing investments, reducing the opportunities for generating returns.
There are a number of ways people can limit the risk of experiencing financial damages caused by dead money. Diversifying investments is critical so if one investment fails, it will not drag down someone's entire investment portfolio. Diversification includes investing in a wide variety of products across multiple sectors. Buying stocks in 10 banks, for example, is not diversification because all of the investor's assets are tied up in the financial sector. Buying three tech stocks, three bank stocks, two utility stocks, and two pharmaceutical stocks, on the other hand, would create more diversity.
Careful research before investing is also used to avoid obvious bad buys. Some investments may look like sound choices on the surface, but research can reveal hidden problems with an investment, such as a predicted shift in company fortunes that may drag down stock value or make it difficult to repay bonds. Financial publications are good resources for evaluations of investment opportunities, as are personal finance advisors.
When someone winds up with a dead money investment, it can create a dilemma. Some people prefer to hold the position in case it starts appreciating in the future. Others believe that such investments should be sold as quickly as possible to limit losses. Selling can be hard once an investment is known as dead money. For people with limited capital, it can be a better choice, as they may not have the funds to hold a long term investment position and will be forced to sell eventually, potentially at an even lower price.
