Each quarter, we send our investment management clients two reports, the Portfolio Statementand the Portfolio Performance Summary. We have designed these reports to be easier to understand than typical brokerage statements, but they still may be confusing for those not familiar with their terms. We would like to take this opportunity to answer some of the most common questions we get about these quarterly reports.
The Portfolio Statement shows you what securities you currently own. The Portfolio Performance Summary tells you what you started with at the beginning of the year, what you have earned on your investments so far, what you have paid in fees, and what your ending balance is. It also calculates your Time Weighted Return, which is the percentage change in your portfolio year to date.
We use Time Weighted Return because this is the accepted standard for measuring performance among investors and gives you the most accurate measure of how we are doing as your manager. This calculation isolates the manager’s performance from the client’s timing of cash flows into or out of the portfolio.
Frequently Asked Questions:
Does a deposit to an account increase the return shown on the Portfolio Performance Summary?
No. The Portfolio Performance Summary shows your deposits or withdrawals, but they are not part of the calculation of your gain or loss.
Are investment returns before or after BWFA’s investment fees?
Investment returns are calculated after our fees have been charged to your accounts and after all trading commissions, paid to TD Ameritrade, have been paid. These expenses are the cost of managing your portfolio, so it is important to incorporate them into your calculation of monthly returns. The Portfolio Performance Summary does not show you the dollar amount of commissions paid for buying or selling securities, but we can provide this information, if requested.
Does the “Yield” column on the right hand side of the Portfolio Statement show the rate of return for each security in your account?
No. The Portfolio Statement is only a picture of your accounts as of a specified date. It does not show you how the securities in your accounts have done over time. The yield for each security is merely the dividends or interest that a security will pay in a year, divided by the current value of the security. We include this column on the Portfolio Statement to show you how much income your portfolio will earn in the next year, if nothing changes.
Is the dollar amount of Realized Gains (Loss) shown on the Portfolio Performance Summary the same as the realized gains I must report on my tax return?
No. This report only shows you the realized gains or loss since the beginning of the reporting period. On your tax return, you report the gain or loss since you purchased the security, which is often before the reporting period began. If you want to know how much your taxable realized gains are, please contact us.
Why does the percentage return shown on the Portfolio Performance Summary sometimes not equal the dollar amount of gain or loss, divided by the beginning value of the account?
This situation occurs when you make large contributions to or withdrawals from your account during a period. An example will help illustrate this effect. Assume that your account had a value of $100 at the beginning of the month and earns 10% during the month, so its month-end value is $110. Then you contribute $1,000 to the account at the start of the second month. For this month, you begin with $1,110, and you earn 1%. Your account balance at the end of the second month is $1,121. The percentage return shown on our Portfolio Performance Report for the two months would be shown as 11.1%, because your return in the first month was 10%, and in the second it was 1%. But the dollar gain is only $21 on the $1,100 you contributed. If you divide $21 by $1,100, you get a return of just 1.9%. From a practical perspective you are interested in your dollar gain of $21, but for judging your investment manager, 11.1% is the meaningful number. It is called “time weighted” return and measures how your investment manager has performed, regardless of how much money he or she is managing for you.
Helping you understand how your investments are doing is an important part of our job. Please contact us at any time if you have questions.