These last few months we’ve been fielding more and more questions regarding the unrealised gains/losses figures in client’s statement or online.
In almost all cases, a client is assuming that this is some sort of representation of performance.
It is not.
No one is able evaluate any element of performance of an account/portfolio by looking at this figure. Full Stop.
Let that sink in for a minute and then we’ll move on and explain why that’s the case, and what the figure is for.
What it’s actually for: Unrealised gains or losses show the net taxable event that would occur in a non-registered account if you were to liquidate the entire account today. They don’t matter in a TFSA or RRSP. Nor should anyone be using it to decide whether to hold onto an investment or sell it, unless you need to make a decision based on the tax consequences.
This figure is missing some key values, including:
- The realized gains or losses that have occurred up to that point in time.
- The interest that has been earned from the securities
- The dividends that have been earned from the securities
Let’s go through some examples of these to help illustrate why this is important.
Example 1 – not showing realized gains/losses
Let’s say you have $2000. You buy two stocks,
- Company A =$1000
- Company B = $1000.
A month later, Company A has done really well and Company B has dropped in value.
- Company A = $1500
- Company B = $750
Company B is still a good company so you want to keep holding it, but you decide to solidify the gains in Company A and cash it in.
If you look at your statement at the end of the month, the value of the account has risen from $2000 to $2250, however the unrealised gains/losses will only show a negative amount: it will show a loss of $250. By looking at that you may come to the conclusion the account is down 12.5% of the original value of the account, even though the account is in reality up a net 12.5%. The unrealised gains/losses will only show the loss that hasn’t been triggered.
Example 2 - not including dividends or income
Let’s say 3 years ago you wanted to purchase a $1000 bond with a 5% coupon. The bond was trading at a premium (which is common), so you had to pay $1075 to purchase that $1000 bond.
Today the bond is trading at par (its market value is $1000). This means that the bond that you purchased for $1075, is now valued at $1000, and would appear as a $75 loss on the unrealised gains/losses page.
This figure does not include the 3 years of $50 coupon payments (5% of 1000) you received while holding the bond. You have made $75 so far holding this bond ($150-$75), but it would appear on this statement that you have instead lost $75.
This is a very realistic and normal scenario, as many bond managers look for bonds that can give their clients a capital loss to offset the income and bring value additional value.
In October/November/December, we go through our clients non-registered accounts and look at the gains we have triggered so far that year. If there are significant gains, we then pull up an Unrealised gains/loss report to see if there are any losses we could trigger to offset them and reduce our clients tax bill. That is what these figures are useful for. It is also useful if someone is considering liquidating an account, to know if they should hold off a few weeks/months until the next calendar year for tax purposes.
Other than that, this figure means nothing. You should in no way be using this figure to evaluate any sort of performance. Instead, we would be happy to send you a performance summary, which is an accurate representation of how you have done.