I dislike the book value metrics used by discount brokers. Not that it’s wrong, as it’s an accurate measure but it’s used to calculate taxable profit and that’s the wrong way to show true profits.
A free DRIP share ends up part of the book value due to tax accounting. Does the DRIP share really have a cost? How do you track the profit of your initial capital along the way? Those are the questions you should ask yourself. Everything is thought for accurate tax reporting for the governments and not for the investor’s view of the portfolio performance.
The following is my opinion based on my understanding of money flow. The ins and outs of money. You are free to disagree but you cannot ignore the thought.
Grab a coffee, or a different drink, a pen and some paper to follow through with an open mind. Keep your mind open, that’s important.
Your Deposits Are Key
Your deposit in the account represents the real money you put to work. Your deposits are the most important entries to track to calculate your profits. Yet, not a single broker shows you that.
You go to work, earn your keep, budget and do all you can to put some money on the side to invest. That money you invest is the money you put to work. It has no book value yet and no return either.
Take this table as an example from the corporate account portfolio. Is the account profitable or not?
It’s pretty simple, isn’t it? Yet, it is so hard to find out how much you deposited into any of your accounts with any online broker. Can you easily check online? The easiest is probably your TFSA because it’s a fixed annual number that you could probably remember.
Homework – Take one account and write down all the deposits. To make it simple, use your TFSA. The deposits for the corporate account add up to $132,000 as an example, so is the account profitable?
Book Value Is For Taxes
Yes, book value is for taxes in my opinion and only taxes. That’s why every trading platform provides you with book value and book value per share as that is the necessary data point for taxes.
It’s the wrong data point for profit though. More on that later.
Due to how taxes work, book value is critical to properly reporting your taxes and that’s why you need it but it is only needed in a taxable account but why would the discount broker help the investor …
Homework – Write down the total book value for your TFSA account or the account you selected in the previous step. It should be the total cost of all your shares purchased including DRIP shares. Notice that it doesn’t match your deposits and that’s ok.
Market Value Is Your Current Total
Depending on your online platform, you should be able to see your total market value or the total account value which is the market value plus any cash in the account.
The total account value is the sum of all your investment market value, including any cash.
Homework – Write down the account value for your TFSA account.
Your True Profit
Your true profit is your account value minus your deposits. Do not use the book value. That’s also called gross profit whereas net profit would be after taxes where applicable.
It will include all the dividends, and all the stocks purchased from the dividends be it DRIP shares or not.
The book value is for taxes and only one account must use the book value and it’s the taxable account (aka non-registered account). All other accounts such as RRSP, RESP, TFSA, or FHSA do not need the book value for taxes since you don’t pay taxes on your capital gains.
Homework – Take your total value minus your deposit and that’s your gross profit.
Brokers Aren’t There For You
One of the most important lessons you need to learn is that banks, brokers, or anyone between you and your money doesn’t have your best interest. It’s not like a lawyer, a doctor, or an engineer where liability exists. In the financial world, there isn’t any liability to look for your best interest.
Only recently did the brokers have to provide you with an annual rate of return. It’s the only true metric and unbiased metric you should use as your compass for your portfolio performance.
Here is what my TFSA account at RBC Direct Investing looks like. My max contribution up until 2023 is $88,000. What does the book cost and unrealized gain tell you here?
Can you see my profits? No, you don’t see it. What you see is the tax numbers that brokers are required to track for you.
What’s my profit? Since I have contributed the maximum to my TFSA every year to date, the deposits are $88,000. So my profit is $132,650 and not $46,745.
Another example with TD Direct Investing which I use for my HELOC investments. I have deposited $40,000 but it’s nowhere to be seen. My profit is just $529.49.
Book cost and gain/loss are again just for tax reporting. The gains are just from the share price here and no shares were added from the dividend payment. It’s missing the cash portion which is all the dividend paid.
Homework – Track your deposits!!! The banks don’t have to maintain historical data past 7 years as that’s what is needed for taxes. So you are on your own to understand your portfolio. Your broker is just a middleman between you and the markets. Usually, it takes years for an investor to realize they are missing something and by that time, it’s a lot of data to go through.
Calculate Your Own Rate Of Return
Since you are on your own to track your deposits, you can easily track your rate of return since inception with a simple XIRR formula.
While dividends are nice to track and provide comfort to know you can earn a certain amount of passive income, the reality is that at any point in time, you can sell your portfolio and buy dividend stocks for the income. Or even covered call ETFs if you want more income.
Your rate of return along with the rule of 72 tells you when you are going to reach your portfolio goals in total amount. From the total amount, you can apply a yield ratio and you get your dividend income.
By the way, yield on cost is meaningless as you get the same yield today regardless of when you bought it.
I use the company Passiv to track my ROR, net contributions, investment growth, average monthly dividend, total dividend, and fees and commissions charged since inception (or any time frame I choose). This is provided free with Questrade. Pretty slick.
Thanks Paul for sharing.
Nice to see a service looking at contributions.
It works well with brokers that can integrate but it’s pretty limited to a couple of brokers at the moment sadly.
With many details being equal between discount brokerage choices, having Passiv’s elite subscription avaialable to me free of charge at Questrade was a clear differentiator.
You are quite right about the book value not reflecting the contributed value so the growth on invested value will be different than the difference between the book value and the market value. However, one question occurred to me as I read your post and that was, ‘What is the impact of withdrawals from the portfolio?
While you may be right that without knowing the contribution amount, the portfolio returns may be misleading. However, it is only new investors who are able to benefit from this idea. After investing for over 50 years, it is strictly academic for most of us. It is impossible to go back and figure out what our contributions were.
Cheers!
You are correct, you cannot easily go back but you could easily do the last 5 years by looking at your account statements.