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Which is the better indicator of an investment's performance?

Which is the real indicator on how an investment is doing, cost basis or investment basis? Also, how does the percentage gain or loss compare to the rate of return?

Personal Finance, Investing
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April 2017

The best indicator of an investment's performance is the total return of the investment, which is growth plus income.

Grading an investment's current value compared to its cost basis will only give you the holding period rate of return if the investment paid no dividends, interest, or capital gains distributions. As an example, when you review a performance chart of a mutual fund or ETF for a specified period of time, the chart should show underperformance if the fund made distributions of any kind.

To calculate your holding period rate of return you need to take the current value of the investment, subtract the cost basis, add any cash flows that do not represent return of capital (dividends, interest, capital gains), and then divide this total by your cost basis. Determining an annualized rate of return is vastly more complicated. Fortunately, most advisors have access to robust software that does this automatically for their clients.

Of course, the above is just general information. Feel free to shoot me a message if you'd like more detailed input.

Best,

Adam C. Harding, CFP

April 2017
April 2017
May 2017