Book value, which is also referred to as adjusted cost base (ACB), is the amount that is calculated by adding the total amount of contributions made by an investor into a particular investment (stock, mutual fund, Exchange-Traded Fund etc.). These total contributions include the initial amount invested, any reinvested fund distributions, minus any withdrawals. Sounds straightforward. So, what's the big misinterpretation that many investors have?

Time and time again we hear from advisors that clients are misinterpreting their statements, particularly when trying to determine how much money was made or lost in their account over a certain period of time. The problem is when investors look at their book value, they often assume it's what they initially invested, and then subtract the current market value to figure out their gain or loss.

Unfortunately, comparing these values often leads to incorrect conclusions regarding actual performance of the investment, and in some cases believing there was a loss when in fact the return is positive. The key factor that needs clarity is that when looking at investment statements, the book value is not necessarily their original investment but can also include reinvested distributions.

Investments like mutual funds often earn interest, dividends and capital gains (losses) from their underlying investments, and the fund will pay out these earnings/capital gains to its unitholders via distributions. With securities, like stocks, a dividend by the issuer of the security to investors are often reinvested to purchase more stocks, which can also increase the book value in a similar manner with mutual fund distributions.

The key takeaway is that the book value that investors see on their statements is greater than their original investment amount if they received distributions that were subsequently re-invested. When an investor received and reinvests these distributions, they are added to the initial investment amount. This combined amount is the new adjusted cost base.

For the visual learners out there, let's look at a simple example:

The details:

January 1, 2022, initial investment: $100,000 Received and reinvested dividends through 2022 totaling $5,000 Book value at Dec. 31, 2022 ($100,000 +5,000) = $105,000 Current market value Dec. 31, 2022= $115,000

The misinterpreted, and very common way to calculate the return:

Market value - Book value / Book value $115,000 - $105,000 / $105,000 = 9.52%

The correct way to calculate the return:

(Market value – amount invested) / amount invested $115,000 - $100,000 / $100,000 = 15%

The rule of thumb

An easy rule of thumb to remember when looking at investment statements and trying to gauge performance is to always use your market value and initial amount invested from your statement. For more information, please check out the Distribution Guide or speak with an investment professional.

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