Are Your Investments Performing Well?

Are your investments performing well?

Many investors look at the unrealized gain or loss on their current month brokerage statements and believe this is an indication of their return on investment. However, that's not the case at all.

The unrealized gain or loss shows only the current market value of an investment less your original cost basis of the investment. This is called market gain or loss depending on what was happening when the statement was created. Literally, by the time you receive your statement your market gain or loss has changed.

It’s always exciting to see market gain grow each month but this doesn’t tell the whole story of how an investment has actually performed or will perform in the future. The unrealized gain or loss on your statement is only an indicator of an investment’s embedded taxable gain or loss during that month and does not reflect an investment’s total return.

What is cost basis and what are reinvested distributions?

Your cost basis is the original price you 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.

However, you only pay taxes on market appreciation when your 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. The $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%.

*Even though the market value and total return are the same, the unrealized gain/loss for the two positions are different.

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.

Performance calculations for a portfolio on a monthly statement can be very complex and over a 30-year retirement even totally meaningless.

Remember as long-term, goal-focused investors we don’t chase performance, we chase outcomes. If your portfolio is up 25% this month or year, congratulations!

But will that matter in 15 years if you run out of money???

Retirement is a marathon, not a sprint.

A portfolio and a plan are two completely different things. Focus on your long-term plan and let the portfolio do the work we designed it to do throughout your retirement.

You Need A Plan

A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services our mission is to increase your time, money and peace of mind by helping you create an income and investment plan that outpaces inflation and aligns with your retirement goals while guiding you through the completion of that plan year after year.

If you are retired or nearing retirement, we can create a plan which will outpace inflation and accomplish any other retirement goals you might have. The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing click here. 

Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisor (RIA) registered in the state of Missouri (CRD# 300772). We work with clients in Missouri and throughout the United States. Being independent allows us to work exclusively for YOU.

We specialize in helping electric cooperative employees create their retirement income and investment plans. Retirement can last 20-30 years. You need a plan!

Photo by Isaac Wendland on Unsplash