Dead money is a financial term used to describe investments that are not earning interest, dividends, or capital gains. Unfortunately we are in a time with lower than expected returns. Record high inflation (reaching 7.9% (1)-the highest we’ve seen since the 1980s), soaring energy costs, supply disruptions, and most recently, the unfortunate invasion of Ukraine, have all contributed to a stagnant market. In this environment, we may face bitter disappointment compared to years past when the market returned at least a healthy mid to high single digit return. Fortunately, there are some things we can do to hedge our risk and also reduce our anxiety.
Understand that with all that is going on, your returns may not be as high as you had hoped. I once took a workplace training that taught me to “Expect the expected”. This concept, simple in nature, was actually brilliant. When your expectations are met or exceeded, you become happier. However, when reality falls below expectations, you feel the opposite. Go into the year with the idea that returns won’t be as much as they were last year. In this situation, when returns are not strong you won’t be disappointed and if they do turn around, well you can celebrate.
Many of you likely already partake in dollar cost averaging. For those of you who have never heard of this term, dollar cost averaging is an investment strategy in which an investor divides up the total amount to be invested into small increments. Dollar cost averaging allows the investor to reduce risk by reducing the impact of volatility. Dollar cost averaging also allows you to take small steps in the process so you can re-evaluate your strategy on a more frequent basis and allow you to react to market changes.
In tough times, especially with high inflation, our dollar doesn’t go as far as it used to. Coupled with lower than expected returns, we may start to feel short on cash. Consider supplementing your income with a second job or side hustle. Evaluate your finances and commit to brining in a few hundred dollars each month to help supplement expenses. Not sure where to start…check out our top 5 side jobs. This is also an excellent time to get creative. Been thinking about starting a passion project or learning a new skill? Use this time to do so. Uncertain times tend to light a fire under people. No longer can we rest on consistent gains and strong predictions. COVID in particular changed the game with work from home. Dead money doesn’t have to mean dead dreams. If your money isn’t working for you right now, find new ways to cement that growth for the future.
Back in March 2020 when the market crashed, many investors yanked their money assuming the worst. By March 16, the Dow dropped 3,000 points-a drop so massive trading was suspended several times. By the end of March, the Dow lost 37% of its value. However, by the end of the year, the Dow Jones closed at +7.5% and the S&P at +16.3%. (2) In one of the worst years of modern times, the market still managed to deliver above average returns. Now one can argue that was the results of an incredible stimulus bill and contentious election. Whatever the case, had investors kept their money in back in March, they would have realized these gains (on average) vs. losing +30%. Looking back even further, in 2008, the S&P saw the worst dip since WW2 losing -38.5% of its value. However, the S&P saw another 6 years of subsequent growth, only falling to -0.7% in 2015. Why am I telling you this? The point is that if historical trends hold true, the market will rebound. Remember, time in the market is greater than timing the market. It’s not my place to hand out financial advice. However, historically speaking, staying the course almost always nets out a positive return-you just have to be ready to play the long game.
Sources:
(1) Statista; https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/#:~:text=The%20change%20in%20this%20price,has%20weakened%20in%20recent%20years.
(2) S&P 500 Historical Annual Returns. https://www.macrotrends.net/2526/sp-500-historical-annual-returns