David Eisenhauer is the founder and chief wealth strategist at Greykasell Wealth Strategies.
Perception is reality – until it isn’t.
Every investor checks their statements expecting to see a clear picture of how their portfolio is doing. Rightfully so. The issue, however, is that numbers can be deceptive.
One of the biggest sources of confusion is the difference between unrealized gains or losses and total return. Though the terms often appear on performance reports, they measure very different things.
An unrealized gain or loss reflects how much the market value of what you still own has risen or fallen. In other words, they are your paper gains or losses if you were to sell everything today.
Total return, on the other hand, captures the full picture of how your investment has actually performed. It includes price appreciation plus dividends, interest and any realized gains or losses from sales or distributions. In other words, total return shows what your money has truly earned.
To further illustrate, imagine three investors. Each of them put $1,000 into the same mutual fund eight years ago. Today, the fund has doubled in value. But depending on how the fund distributed income and gains along the way, each investor’s statement may tell a different story.
Consider the table below.
Again, all three investors experienced the same overall growth – 100%. Still, if you looked at the unrealized column, you’d think each one of them experienced much different fates. The reason is that distributions (dividends, interest or capital gains) reduce the fund’s net asset value (NAV). When that happens, the unrealized gain appears smaller even though the total value of the account hasn’t changed.
This dynamic can trip up even seasoned investors. You might log in, look at one of your holdings and see an unrealized gain of only 40% over the last ten years. You’d assume your returns are lagging, since the S&P has done much better than that over the same period. But what’s missing are the dividends and capital-gains payouts that may have already been reinvested or distributed to you in cash.
The rise of professionally managed portfolios and broader fund ownership has magnified this confusion. More people than ever now hold mutual funds and ETFs inside their retirement or brokerage accounts.
To complicate matters, custodians tend to display data differently. Some emphasize unrealized gains. Others focus on market value. Only a few highlight total return.
That’s fine in world where everyone knows the difference between those terms. But many don’t, which makes it easy for them to draw the wrong conclusion about performance.
Above and beyond being a source of frustration, misinterpreting performance also increases the chances of emotional decisions, whether it’s selling what looks like a “loser” or chasing what seems to be “winning.” As we’ve seen, those types of movements are based on incomplete information.
Next time you review your account, adjust your statement view or online dashboard to display total return including dividends and reinvested distributions. Then compare investments on that basis.
You may find your portfolio has done better than you thought — because in investing, what looks disappointing on paper often tells a very different story once you see the whole picture.
