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?
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.
Adam C. Harding, CFP
Total return is the best indicator of an investments return, assuming no inflows or outflows during the period of time you are looking at. Total return takes into account capital appreciation and income from the investment. Calculating the return for a whole portfolio can be trickier, but it is generally accepted that Time Weighted Rate of Return (TWRR) is the best indicator of your portfolio’s performance. TWRR takes into account cash coming in and out of the portfolio, as well as, multiple purchase or sales of investments over a given time period.
Compared to what? I like to use the MAR RATIO which is the investments CAGR (Compound annual growth rate) divided by it's Maximum Drawdown. This way, you can compare how much money your investment would have lost to make you that rate of return.
Before you make any investment, you should ask your advisor to run those figures for you. If they can't, then you need a new advisor and a new investment!