As an Investment Advisor with RBC Dominion Securities I have often been asked about Book Values, what they mean and how come they don’t necessarily line up with the performance numbers of an investment account.

I recently read a great article from RBC Global Asset Management that helps illustrate what Book Values are and how using them will impact performance calculations.

 

Using book values from your investment statements to calculate the performance of an investment will lead you to the wrong answer, almost every time.

 

When you look at the Book Value figure on your statement you may equate that amount to your original investment amount, however those two numbers are likely different.

 

The Book Value is your original investment plus distributions (dividends, interest income, etc) reinvested divided by the number of shares/units you own.

Many Canadian investors reinvest their distributions and never actually ‘see’ the money. This is likely the causes of the confusion between amount invested and book value.

 

Let me use an illustration as an example.

• $10,000 invested with no subsequent purchases or redemptions
• $1,000 distribution reinvested at the end of Year 1
• 15% growth in market value in Year 1
• 10% decline in market value in Year 2

Year	Amount Invested	Reinvested Distribution	Book Value	Market Growth	Market Value
0	$10,000		$10,000		$10,000
1		$1,000	$11,000	$500	$11,500
2			$11,000		$10,350

 

If at the end of Year 2, you looked at your statement and compared your Book Value to your Market Value, you may be under the impression that you are down $650 or -6.3% ($11,000 - $10,350).

 

The reality is you are up $350 or 3.5%. This works out to a rate of return of 1.73%/year.

 

Book Value is a useful number when calculating capital gains for tax. But using book values to calculate performance usually results in a number that is lower than it should be. This is shown in the example above, where the true return using the original investment amount is 3.5% or 1.73% annually, but the same calculation using the book value produced a return of -6.3% or -3% annually – a significant difference.

 

If you would like to learn more on Book Values, please contact me for source information.