Not the Same
From debunked news articles to deceptive social media posts, we have come to learn that not everything we see online is as it may seem. This can also be true when trying to evaluate the performance of an investment online. Many investors mistakenly compare an investment’s cost basis to its current value and believe this difference to be the gain or loss of the investment. Know that unrealized gains or losses may not be the same as an investment’s return. Allow us to explain…
Let’s say that you buy $10,000 of a stock mutual fund. Over the course of a few years, the fund pays dividends totaling $800 which you decide to reinvest, purchasing more shares of the same fund. With each additional purchase, your basis goes up so that your total cost basis is now $10,800 ($10,000 original investment plus $800 of reinvested dividends). Now, let’s assume that the value of the fund after three years is $10,600. Online, you will see a cost basis of $10,800, a value of $10,600 and an unrealized loss of -200. But, remember, you only personally invested $10,000 of your own money; the rest of the purchases were made with dividends earned from the investment itself. So, you have actually made $600.
Unrealized gain and loss detail provided online is helpful in determining the amount you may pay tax on (or not, if at a loss) if an investment is sold. In large part, it should not be used to measure performance. Also keep in mind that unrealized detail is only provided on current holdings and will not include previous holdings that were sold.
Your investment advisor will provide periodic performance reports and may also provide actual performance online. Avoid misunderstandings by relying on these resources to evaluate your return, instead of unrealized gains or losses.