Calculation of long term gain or loss

Old_Joe

In calculating the long term gain or loss from an investment, I simply subtract whatever I paid for the thing from whatever it's current value might be. If I originally paid $1000, and the value is now $950, then I've lost $50.

I notice though, that for all of my stuff at Schwab, they don't look at it that way. Not only do they consider the initial amount of the purchase, but all reinvested dividend amounts as well. Now, I can see the reasoning there: if the dividends were not automatically reinvested, then they would be sitting somewhere as available cash.

Yet, in looking at the long term results of any investment, I can also see the reasoning in simply asking "How much did I originally invest, and how much do I have now?"

I'd be interested in hearing how other MFO folks view this question.

Dex

You made another investment with the re-invested dividends.

Also, you have to consider what valuation method you chose for selling, e.g. FIFO or LIFO etc

Old_Skeet

Hi @Old_Joe,

Don't confuse cash "amount" invested with cost basis.

The link below does a good job in explaning the difference.

https://schwabpt.com/downloads/docs/pdflibrary/spt011260.pdf

msf

Remember that the way you declare the cost basis (at least for covered securities) is by telling your broker before the trade settles. You don't have until later when you file your tax return to decide what works best for you.

I'm not sure how Schwab does things, but on the M* boards, yogibearbull has posted that Fidelity reports gains the way OJ described (i.e. taxable gains) in taxable accounts, but the way OJ seems to want (i.e. increase from contributions) in IRAs. I've never bothered to check this.

These different calculations have different purposes, neither is right or wrong.

Note that for tax purposes, the calculation for bonds is nowhere near as simple as it is for equities or funds. (The Schwab page somewhat alludes to this with its mention of amortization, but it doesn't delve into this.)

For example, suppose you purchase a bond that matures in a year and a day. It has a 4% coupon, and you purchase it for $103. It matures at $100. Your loss is $0. Your interest payment was $4, but your taxable interest was $1 (the $3 "loss" is written off against the interest, not the capital).

That may be the simplest possible example of how things get weird with bonds. Here's an AAII column that explains a bit more of this for bonds (though the laws have changed slightly since it was written, so use it just for concepts, not precise calculations).

LLJB

Hi @Old_Joe, you didn't specify whether you were talking about for tax purposes or for your own return calculations and that may create a difference. As other have noted, for tax purposes reinvested dividends add to your cost basis because you pay tax on the dividends regardless of whether they're reinvested or not.

For a personal return calculation, if you reinvest the dividends then subtracting what you paid from the current value is a reasonable way of calculating what you've earned with that investment. If you take dividends as cash then you actually need to add those dividends to the current value before subtracting what you paid to get a total return.

Old_Joe

"These different calculations have different purposes, neither is right or wrong."

Thanks guys- I was just interested in a relatively straightforward way for personal calculations- nothing to do with tax calculations, and just for funds and a couple of equities with dividends reinvested. I've been doing this the "simple" way for some 40 years, but was curious to know if I was being stupid as usual.

bee

I think this is also the misleading component of Yahoofinance charts verses M* charts. M* charts reflect dividends & capital gains reinvested where as Yahoofinance charts are purely price charts.

Price charts are misleading from a total return perspective because dividends, splits and capital gains distributions reduce the price of the share making stocks and mutual funds appear like awful investments.

Here's an example using PETDX.

Yahoofinance chart reflects the price of the share price movement of PETDX over the last ten years while M* reflect the total return of the fund with dividends reinvested over the last ten years.





An interesting side note reviewing Yahoofinance chart reveals that the dividend pay outs act as a drag on the share price of PETDX, but recently (Aug 2015) the fund conducted a 1 for 2 split reducing the share price in half.

I believe I have thoroughly confuse and distracted myself and I fear this has been of no help to you OJ.

Old_Joe

No, but it's all very interesting ! Thanks, bee, and again to the rest of y'all.

For quick and dirty personal use, I'm really just interested in knowing whether that $1000 I spent on DOPEX a couple of years ago is now worth $2000, or more likely, $100.

Glad to know that this doesn't involve serious rule-breaking. (Not that I've ever been all that great on rules...)