What are your investments trying to tell you?

Cracking the code on investment statement lingo

First things first: the fact that you are receiving investment statements indicates that you are indeed saving and investing your hard-earned money in order to build wealth and safeguard your future. Awesome.

If you’re like many investors, you probably stressed about which investments to choose and discussed the various asset allocation models ad nauseum with your financial advisor. You were introduced to an alphabet soup of new terminology and acronyms, to which you nodded and knew you would never remember even if a dinner date with Clive Owen depended on it. Now, when you receive your quarterly investment account statements, the letters and numbers swim in front of your eyes. You quickly scan the top page to find the one number that represents the current dollar figure in your account, then toss the pages into a file folder, figuring you might need them come tax time.

Ok, so it's a system that works for you. Or does it? Wouldn’t you rather know what you are missing? Maybe there’s some good news buried in there amongst all the figures and financial blah-blah. Maybe if you understood the terms, you would be able to make that current dollar figure grow even faster. Aha – gotcha! Read on sister; we’re here to make reading your investment statements less intimidating and maybe even fun for you (who would have thought?!).

Understanding Value – Market Value vs. Book Value vs. Equity Value

• Market value - The portfolio value or market value describes how much your investments were worth at the end of the day’s closing prices as of the statement date, if you had sold them on the market that day. Which of course, you didn’t, or you would be holding a cheque and not a statement of your account. (Do not be tempted to ‘cheque out’ early!)

• Book value – How much you’ve invested (paid) for your total current investment portfolio.

• Total portfolio (equity) value (aka “the bottom line”) – This represents the total market value of your securities, plus any cash balance if you have one, or less any debit balance (aka “borrowing on margin” – you risky little thing you).

Your Asset Details - Prices, Costs & Quantities

• Current (market) price - The price of the share or mutual fund unit that you hold, as of the statement date.

• Average unit cost - The price you’ve paid over time (taking into account any purchases, sales, and commissions) and averaged out across the entire time you’ve held your investment.

• Adjusted cost base – Your average unit cost multiplied by your total number of units held.

• Quantity (number of units) – When you signed up, you bought a certain number of shares or units. If you’ve been continuing to buy more over time, either directly or through a dividend reinvestment plan (DRIP), your number of units will keep rising.

Transaction Summary

• DRIP – A dividend reinvestment plan takes those lovely dividend payouts you receive from your dividend-generating shares or mutual funds and uses them to buy up more shares or units of the same investment. This is a quick and painless way to start getting your money to make more money for you.

• PAC – Pre-authorized chequing plans are for the clever girl who signed up for the PAC in order to invest a little bit each month. Not only is it more manageable for your cash flow than trying to come up with a big lump sum each year, PAC gives you the benefit of dollar-cost averaging. This allows you to keep your “average unit cost” stable, since some months the share or unit price may be high and some months, it may be low.

How am I doing?

• Rate of return – This measures how much your investment portfolio has increased (or decreased) on the basis of how much you have invested vs. how much your investment portfolio is worth on your statement date. Your return may fluctuate quite a bit between statements, so it’s best to focus not on the given month or quarter, but rather to look at your return over a longer period, such as your annual return (the last 12 months).
• Annualized rate of return – More of a theoretical number, your annualized return takes the return you’ve earned over the statement period and extends it out mathematically so you can see what kind of annual (12 month) return you will be getting at this rate. This is not to be confused with the annual return, which is your actual return calculated over the past 12 months.

Just open it!

Though it may be a challenge to remember all the terms and definitions from quarter to quarter, the most important thing to remember is to open your statement and review it. Understanding your statement gives you insight into how your investments are doing and allows you to measure your progress. A smart investor is an aware investor and for many of us, opening the envelope is the toughest part. One, two, three…

 

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