5 Money Drains That Could Hurt Your Investment Returns

When you’ve had enough forethought to invest your capital, maximizing your return on investment will be a priority for you. Even the best portfolios can have hidden money drains that impede your progress, and knowing where they are will help you to decide what, if anything, to do about it. Sometimes, you might think that these “money drains” are worth tolerating – after all, every portfolio and every investor is different. However, it should be a conscious choice in which you’ve weighed your options and made a reasoned decision. Watch these money drains and decide whether you’re satisfied with them or not.

1. Your Fund Managers’ or Broker’s Remuneration

When people work, they must be paid. When you work through a broker, the fees you pay should be a known quantity. If you buy into a managed fund, it has fund managers, and your investments contribute to their remuneration. If your brokers, or the fund managers that run package investments, are  making you more money than you’d get from simply buying into funds similar to exchange traded mutual funds in Canada that track major indices automatically, it might be worthwhile.

The sad truth, however, is that many managed funds don’t make more money than those run by software. In fact, they can underperform when compared to benchmarks. That doesn’t mean that investment experts are underqualified or have poor business acumen. There are many factors that might affect their well-thought-out strategies. But if they’re consistently costing you money to earn you the same or less than you’d get from a “no-brainer” investment package, your contribution to their earnings is simply a waste of good money and you’d be better off putting it into a tracker fund.

2. “Lazy” Investments

To simplify this concept, let’s make the general assumption that most of the more secure investments aren’t big revenue spinners but can be relied on to bring in dividends and either grow in value or at least maintain it. Riskier investments have the potential for higher gains, but also may lose value if things don’t work out as planned. Of course, this is a generalization and there are exceptions to the rule.

Now, let’s suppose that you’re quite conservative investor – one who prefers the safer options, but you have an asset that’s not performing up to par. That’s a lazy investment, and the money you have tied up there would bring you more income elsewhere.

We often find this happening with property ownership. You have a property other than your primary residence and you’re probably renting it out, getting a (reasonably) secure monthly income from it. But is that income equal to or better than the income you could get from investing in stocks? Is the value of your property increasing sufficiently to make it worth hanging onto? If the answer to either or both of these questions is “no,” consider selling up and putting your capital into other investments instead.

3. Sore Losers

Nobody likes to see stocks losing value, and accepted wisdom is that it’s time to sell if a particular stock drops 8 to 10 percent of value when compared to the amount you paid to get it. But general rules don’t always apply, so do give this some thought before throwing in the towel. If the future looks bright in that asset class and for that investment, but current times are tough, you might want to hold on and wait for a recovery.  Remember, investment is a long-term game.

Let’s look at an extreme example. Following the diesel emissions scandal in 2015, Volkswagen’s stock prices plummeted by 32 percent. Just two years later, the company’s stocks had recovered their value and even exceeded pre-scandal values. Those who sold out at low prices would not have lost any of their original investment capital if they were willing to wait those two years out and investors that sold their stocks at rock-bottom prices lost half of their original investments.

Should they have held on? At the time, it was a matter of opinion. Many people thought that Volkswagen would never recover and, indeed, it was only through a complete restructuring and rebranding that it was able to do so. It’s also worth bearing in mind that investments in Volkswagen underperformed heavily during the recovery period. Would the capital have worked harder for investors even if they sold at the lowest value? That would depend on where they had reinvested.

The bottom line? Do your homework before selling out of a stock because of declining values. Then take an educated guess as to what the future holds and consider what your alternatives are. Now make your decisions based on that. You may be wrong. You may be right, but at least it’s a proactive approach rather than a knee-jerk reaction.

4. Failing to Evaluate and Rebalance Your Portfolio

A balanced portfolio spreads risk by diversifying investment across asset classes. It means that when one sector is doing well, you make up for any losses thanks to returns in sectors that are performing better. As a simple example: if all your investments are in the commodities sector, your investments will only do well when this notoriously volatile sector is also doing well. When it experiences tough times, so do you. So, instead of having all your eggs in one basket, you diversify into tech stocks, industrials, financials, property, and so on. You can also diversify across markets in much the same way.

However, a well-balanced portfolio can become unbalanced over time owing to market dynamics, and you should be ready to adjust the percentage of assets allocated to each sector accordingly. If you’re thinking this takes a lot of acumen and a lot of money to do effectively, you’re right! However, if you are investing in this way, whether on your own or with the help of a broker, you do need to keep your eye on the ball and rebalance, or call for rebalancing from time to time.

One way to escape all this is to buy into one of the internationally recognized funds that pools investment money and then distributes it in a balanced way. This allows you to have the benefits of a balanced portfolio without having to do the work yourself. These big investment funds also have massive resources that allow them to follow markets far more thoroughly than any single person or small brokerage company can. The theory is that you get the benefit of some of the world’s top money minds who are being fed information that few others would have the time or resources to collect and collate. Naturally, rebalancing the pooled investments they manage is part of that.

5. Tax

In closing, let’s not forget that tax can be a major financial drain. Since taxation laws differ from country to country, it would be difficult to give any specific advice other than to say that you need to be aware of the actions that will give rise to tax events and try to minimize their impact. Unless you are an expert in taxation, it would be advisable to consult with someone who is. Yes, these consultations have costs too, but the money they can potentially save you more than makes up for that. Of course, we must comply with the law, but there’s no point in paying more tax than you absolutely have to, and specialist input can save you from doing just that.