If you are like many folks, I am afraid that perhaps you are reading your “unrealized gain/loss” information incorrectly from your brokerage account statement.
Far too often, I receive calls or emails from clients asking why a particular mutual fund they own shows an unrealized loss when the stock market has been doing well. Bewilderingly, many times a mutual fund could be performing well, but it displays an unrealized loss on one’s statement. Yep, it is true, and this understandably causes confusion with investors.
The primary reason for the discrepancy is that financial firms reveal the “unrealized gain or loss” for tax purposes. Said differently, when your mutual funds pay out dividends or capital gains, it is a taxable event. Therefore, to make sure that you do not get double taxed, your cost basis (what you paid for the investment) is adjusted upwards to reflect the amount already taxed.
As an example, please spend a moment reviewing the illustration below. The last column indicates the client’s gain/loss for a particular mutual fund ($977.96). However, it is paramount that we look directly below this unrealized loss amount to see what the amount invested was in the fund, excluding reinvestments of dividends and capital gains.
Notice that the amount invested is $2,682.79 and the current value is $12,579.17. Therefore, the client has a $9,896.38 profit from his or her original investment! Regrettably, far too many clients look only at the gain/loss number and not the information below. In the end, clients think they have an unrealized loss of $977.96, while, in fact, they gained $9,896.38
Description % of account QTY Adjusted price Adjusted cost Current price Current value Unrealized gain/loss
ABC Fund
L = long term
S = short term
nc = not covered
m = multiple purchases
In the final analysis, your unrealized gain/loss column of your brokerage statement should not be used as a performance indicator. I strongly encourage you to take a moment and review your most recent statement to see if there is a contradiction as noted in the illustration.
