Unrealized Gain/Loss Doesn’t Equal Performance
March 10, 2020 | By Katharine George, CFP®, AEP®
Did my investments do well? Many investors look at the unrealized gain/loss on their brokerage statements and believe this is an indication of the return on their investment.
The unrealized gain/loss shows the market value of an investment, less the cost basis of an investment; this is also considered market appreciation. It’s exciting to watch market appreciation grow over time, however, this doesn’t necessarily tell the whole story of what an investment has earned.
To take a step back, cost basis is the original price paid for an investment plus reinvested distributions. This includes dividends and capital gain distributions.
Reinvested distributions are added to your cost basis because you pay taxes on those distributions annually when your tax return is filed. In contrast, you only pay taxes on market appreciation when an investment is sold.
Let’s look at an example:
Let’s say you invest $10,000 in mutual fund A and $10,000 in mutual fund B. This $10,000 represents the original cost basis for each mutual fund.
Over the course of the year, the market value of mutual fund A goes up by $1,000 due to market appreciation, but there are no dividends paid. Mutual fund B earns $1,000 of dividends that were reinvested, but there is no market gain.
What does this mean?
Both mutual fund A and Mutual fund B have a new market value of $11,000, and a total return of 10%.
| |
Original Purchase Price |
Market Appreciation |
Dividends Reinvested |
New Market Value |
Total Return |
| Mutual Fund A |
$10,000 |
$1,000 |
0 |
$11,000 |
10% |
| Mutual Fund B |
$10,000 |
$0 |
$1,000 |
$11,000 |
10% |
But, though the market value and total return are the same, the unrealized gain/loss for the two positions are different.
| |
New Market Value |
Cost Basis |
Unrealized Gain/Loss |
Total Return |
| Mutual Fund A |
$11,000 |
$10,000 |
$1,000 |
10% |
| Mutual Fund B |
$11,000 |
$11,000 |
$0 |
10% |
The unrealized gain/loss is only an indicator of an investment’s embedded taxable gain and does not reflect an investment’s total return. This can make performance difficult to track over time.
Because performance calculations for a portfolio can be complex, Wealthstream employs specialized software for performance reporting. Wealthstream clients can view their performance uploaded quarterly to the Vault on myWealthstream, or by requesting performance reports from their advisors.
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