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There’s concept in finance and it’s called dead money. Money that doesn’t move and loses value overtime, but has an investable case. And this financial concept should play an essential role in your portfolio construction.
You have approximately 55,500 companies in the world to choose from, 195 countries, and different investment vehicles for each one.
This is fundamental in why indexing is so popular. If you buy the haystack you will find the needle, but at the cost that your performance might not be as great.
Within those 55,500 companies there are maybe only 100 that are the best investment today. But that same 100 maybe won’t be the best investment 3 years from now.
Over a 30 year time frame there may be several turnovers in what was investable 1-10 years ago to what is investable today. And that is demonstrated in the turnover of the S&P 500. In the 80s oil companies dominated, but if you look today it’s tech. You would not have made out so great if you would have held only energy companies from 1980 to today. Actually you would have, but it would not have been as great as it could’ve been, and who doesn’t strive for the best.
You don’t have to be a hero, but you should be making a concerting to take a sobering look at your investments, or paying someone to do it for you.
Here’s a hypothetical scenario to demonstrate a possible outcome of repositioning dead money. Keep in mind that this is illustration is based on past performance and is no guarantee of future performance.
You own a basket of individual stocks, it makes a lot of sense to do so for a lot of people. Individual stocks come with no holding costs, they are more tax efficient, and transparent (especially in the US).
So let’s say you own these 5 companies (which is not enough, but for example purposes it’ll do):
You own all of these at equal weight (20% a piece, and you’ve own them for 5 years) and you rebalanced quarterly, and that is it.
Your performance is significant, you doubled in 5 years (a great compound annual return).
But now let’s take a look at a different scenario, one that is taking a look at dead money and trying to predict logical outcomes in the market.
You saw that oil investments before 2021 weren’t a good investment, because inflation was low and there was a predicted recession in 2019. So you put that 20% into the other 4 equally, pushing Apple, Disney, JP Morgan, and John Deere to 25% a piece.
Then in 2022 after seeing how much Disney was losing in streaming you decided it was good to get out of that and put your Disney position back into Chevron, because inflation was high and oil prices were rising.
The performance speaks for itself. Good long term investments can be bad for years before becoming investable, or becoming investable again. It’s obviously best to avoid holding securities that will not move or lower, because they will inevitably work against you. If you’re money isn’t working for you, you’re doing something wrong and it’s time to rethink your strategy.
Take a sobering look at your positions, what might go wrong, what might go right, and position carefully. In actual implementation it will look drastically different than the example above, because the market is much more complex than 5 stocks. Maybe stocks aren’t what you should own at all. People thought stocks in general were considered dead money when interest rates were 18%+ in the 70s and 80s.
Watch out for dead money.
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