{"id":2748,"date":"2019-03-26T12:02:55","date_gmt":"2019-03-26T16:02:55","guid":{"rendered":"https:\/\/www.focussf.ca\/?p=2748"},"modified":"2019-03-26T12:02:55","modified_gmt":"2019-03-26T16:02:55","slug":"clarifying-book-value","status":"publish","type":"post","link":"https:\/\/focussf.ca\/en\/clarifying-book-value\/","title":{"rendered":"Clarifying Book Value"},"content":{"rendered":"

\"Global<\/a><\/p>\n

I often receive questions from investors about the usefulness of book values and whether it should be used in the portfolio performance calculation. I came across an interesting article written by Edgepoint[1]<\/a> that explains very well the calculation of this value, its usefulness and the wrong conclusions that investors often derive from it. Exceptionally, I used the complete article that I find very well written.<\/p>\n

Who would have thought \u201cbook value\u201d was so confusing? Clarifying a common issue on your account statements.<\/strong><\/p>\n

When investors view their account statement, a common misconception is to compare the difference between the \u201cbook value\u201d (also known as adjusted cost base, or \u201cACB\u201d) of their portfolio vs. the market value, in order to determine how much money was made or lost in their account over a given period. It sounds pretty straightforward, right? At least that\u2019s what Accounting 101 taught us. However, comparing these values usually leads to inaccurate conclusions regarding actual account performance.<\/p>\n

The book value includes all your contributions to the fund. However, if you elect to receive the fund distributions in units, your book value is adjusted by the automatic reinvestment of distributions. In simple terms, when a fund pays a distribution you get taxed on it, but when the distribution is in fund units, the book value increases at the same time by the amount of the distribution to avoid double taxation. This information is reported on your T3 slip.<\/p>\n

Therefore, your book value could increase even if you don\u2019t contribute more money to your portfolio, making it a misleading metric to use to evaluate how your portfolio has done. Book value will also be impacted by your withdrawals.<\/p>\n

Why can\u2019t we just forget about book value? Book value is actually used for non-registered plans when calculating capital gains and losses for income tax purposes. Any capital gains or losses triggered by a redemption or a switch, are reported on a T5008 tax slip.<\/p>\n

How can I tell how much I\u2019ve made if I can\u2019t use book value? You should look for the \u201camount invested\u201d in your statements and compare it to the \u201cmarket value\u201d to calculate how much you\u2019ve made or lost on a given investment. \u201cAmount invested\u201d excludes any reinvested distributions, but will include all your contributions and withdrawals. You can find this information on most dealer account statements.<\/p>\n

I can\u2019t believe I\u2019m saying this, but show me the math!<\/p>\n

Okay! Here\u2019s a hypothetical investor. What was the client\u2019s return?<\/p>\n

– Client invested $40,000 on July 9, 2015<\/p>\n

– She received three years of distributions totalling $11,000<\/p>\n

– Book value is (40,000 +11,000) = $51,000<\/p>\n

– Current market value = $51,880<\/p>\n

Old me (wrong calculation)<\/span><\/p>\n

Return = (Market value – Book value) \/Book value<\/p>\n

= (51,880 – 51,000) \/51,000<\/p>\n

= 1.73% cumulative return<\/p>\n

New-and-improved me (right calculation)<\/span><\/p>\n

Return = (Market value – amount invested) \/amount invested<\/p>\n

= (51,880 – 40,000) \/40,000<\/p>\n

= 29.7% cumulative return<\/p>\n

The mystery of book value, solved!<\/p>\n

Book value is not an appropriate representation of the total amount invested. Rather, it\u2019s used to calculate capital gains and losses for income tax purposes. To calculate your true performance, use your market value and amount invested from your statement. While this information may not appear on your monthly statements, most dealers put it on their annual statement with the actual return. If you don\u2019t have this information, please contact your advisor for assistance.<\/p>\n

[1]<\/a> https:\/\/www.edgepointwealth.com\/downloads\/Clarifying%20book%20value.pdf<\/a><\/p>\n

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The information contained in this article was prepared by Sylvain Lapointe, an investment advisor attached to PEAK Securities Inc., but do not form part of the advisor’s activities as an investment advisor; they have been obtained from sources that we believe to be reliable, but are not guaranteed and may be incomplete. The author does not hold himself responsible for the financial decisions of the readers following this reading. The opinions expressed herein do not necessarily reflect those of PEAK Securities Inc. PEAK Securities is a member of the Canadian Investor Protection Fund.<\/em><\/span><\/h6>\n

<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

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