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Understanding your Statements – Book Values

There is a lot of confusion about reading statements.   People often compare their book value with their market value to see whether they are up or down on a particular asset.  Is that valid?  

Our answer:  it depends on how the dividends are distributed.   They can be distributed as cash vs buying new shares.  

For stocks/ETFs, dividends are typically not re-invested.  They default to come into your account as cash.  If that is the case, then the book value is the actual cost you spent at purchase.  The difference between the book value and the market value is your gain/loss in value.   

Keep in mind when looking at your gain/loss, it does not take into consideration the dividends which came into the account as cash, which for some assets are significant.    You may have a holding which never seems to go up but has a 6% dividend which is dropped into your account consistently.  

For mutual funds, dividends are typically reinvested.  That means that every time there is a distribution, which can be monthly, more units are purchased which pushes the book value up.   

For example, say you bought $1,000 of a monthly income mutual fund (something like PIMCO monthly income or Manulife Strategic Income), which has a 5% yield.   Your book value and market value on purchase date was $1,000.  Every month you receive a dividend 0.42% which is used to buy new shares.  Every month your book value now increases by $4.2.  At the end of the year, your book value is now $1050.  If the market value was $1040, it actually shows a $10 loss, but the reality is, you are up $40.    

This scenario is not at all unusual, especially with fixed income funds.  

Is there a better way to convey information on statements?   Very possibly.   Manulife Securities has new statements on the way which are meant to be easier to read.  

As always, we are happy to answer all your questions about how to assess your portfolio.