What it is
Performance drag is the reduction of earnings from investments for reasons other than market performance. It is the difference in your potential returns before and after accounting for costs that come with investing.
The common causes of performance drag include transaction costs, fees, and taxes. Cash can also create performance drag if you have a lot of it in your portfolio.
This is because physical cash and money in savings accounts grow very little (or not at all) and may have a higher potential to earn if invested instead.
What it means for you
You might get a better idea of an investment’s earning potential if you’ll consider performance drag. Look at an investment’s fees and taxes to know if they’re reasonable or if you might end up losing more money than you’re earning.
Cash drag is also something to think about when deciding whether your portfolio could use more cash or if you should invest some of it.
Keep in mind that it may be impossible to fully eliminate performance drag from your portfolio since it’s caused by various factors.
Some fees and taxes are also unavoidable. You might want to focus on keeping these costs manageable instead, but remember to check periodically to see if the figure has changed.
