In short, no! This may surprise you, and it surprised me when I discovered it. I stumbled across the issue several years ago.
On August 15, 2012 I invested $5,000 in a mutual fund at Fidelity. On December 31, 2012, this position was worth $5,237.47. In doing the math, this would reflect an increase of 4.75%. On Fidelity.com, they reported a return of 1.58%. Why?
Everything revolves around the cost basis. Most people use a starting point of what they paid for their investment as their original cost. For fidelity.com, it is all about tax cost basis. What do I mean? If an investment pays out dividends, interest, or capital gains, and the investor wants those reinvested, those amounts are considered new purchases, increasing the cost basis. In my case, $138.28 was paid out in dividends and $20.34 in capital gains in mid-December. Those amounts were added to my original $5,000 purchase to come up with an adjusted cost basis of $5,138.28, resulting in their “Performance/Change Since Purchase” percentage calculation reflecting only a 1.58% gain instead of the true 4.75%.
So should you ignore broker’s (i.e. Fidelity, Vanguard, E*Trade, etc) report on your performance? Generally, yes. Why? Since bond funds pay out all their interest and most all of their capital gains, the Change Since Purchase % will typically hoover around 0% year to year, even though they did perform. For stock funds, many of the funds we recommend hold dividend paying stocks and the managers do sell positions that create capital gains. Therefore, if you have dividends, capital gains and interest reinvested (many of us do), it will virtually always either understate gains or overstate losses.
What to do? Morningstar.com is your best source for actual performance. When we provide an update and recommendations on client investments, we provide a Morningstar report on virtually all positions. That is your best source for performance.
Mark Berg, President
TimothyFinancial Counsel, Inc.