When trying to figure out your own performance, it’s common to look at your unrealized gain and loss first on your statement (Charles Schwab, Fidelity, TD Ameritrade). The problem with trying to evaluate performance based upon the gain and loss column alone is that it doesn’t reflect your total return and the impact of rebalancing.
Rebalancing entails selling assets that have grown beyond your target and buying assets that have fallen below your target, meaning, selling overvalued securities to buy undervalued securities. When rebalancing occurs, the assets sold likely had a large unrealized gain. Once sold, that gain is wiped out and the proceeds are re-invested in an asset that may show an unrealized loss or a much smaller gain. Rebalancing helps avoid your portfolio drifting too far from your target allocation of stocks, bonds and specialized investments to reduce your risk if the stock market were to decline. Furthermore, rebalancing takes advantage of the shift over time in which assets are in or out of favor.
Total return takes into consideration changes in the price of the asset (unrealized gain/loss), dividends, interest and capital gains distributions received. For many investments, such as more income focused mutual funds, most of the return comes from the components of total return that are not reflected in the unrealized gain or loss column on the statement. Below is the formula to calculate total return.
Examples of total return over the last year
(June 1, 2016 to May 31, 2017)
Vanguard Intermediate-term Tax Exempt (VWIUX) – Municipal Bonds
StoneRidge Alternative Lending (LENDX) – Specialized Investment
StoneRidge Reinsurance (SRRIX) – Specialized Investment
DFA US Large Cap Value (DFLVX) – US Large Cap Value Stocks
Quarterly distributions with a year-end capital gains distribution
For clients, we suggest you use the Merriman client portal to view and evaluate the total return of your positions, accounts and your overall household. The portal includes your since-inception performance and much more information. Please contact your advisor if you have additional questions about how to better understand individual position and account performance.