Keeping track of "out of pocket" cost basis

Question

Dilemma

I have some criticism about the cost basis reported on brokerage websites. It isn't your out-of-pocket cost basis. It accounts for reinvested dividends. As a result, the gain/loss number might be a misleading color. The red loss number might make it look like the investment was a poor choice, but in fact you actually the investment grew in value.

Example

Let's look at SWAGX, a aggregate bond index fund. My initial out-of-pocket investment was $1,000. After some time, it collected $4.17 dividend and was used to buy more shares of SWAGX. It's NAV also dropped in value during this time. The net effect of the interest and the NAV drop was +$0.06. The investment grew by 6 cents. It's good! But it's sidelined by this ominous red -$4.11 gain/loss number. These two numbers have contradictory feelings.

Question

I realize the previous example is simple. I could have just written down in my notebook that my out-of-pocket expense was $1,000. Then I'd ignore whatever is in the gain/loss column. I'd take the market value minus the $1,000 to get my investment growth. However, I have other funds that are much more complicated: dozens of lots bought at different NAV price points. In these complicated cases, how do you personally keep track of the growth of the investment above your out-of-pocket cost basis? It's really hard going into my history and adding up all those numbers. I just want a quick way to evaluate whether the investment grew or loss.

Answer 1

The table shows your capital movements. It doesn't account for your income (dividend) flows.

You bought 102.781 shares, partly from your initial $1000 purchase and partly from reinvesting the dividends.

As you observe, it doesn't track your dividends separately. So you'll need to track something yourself if you want to look at the gains or losses based on just the capital you contributed, excluding reinvested dividends.

Since you don't want to have to deal with all the dividend amounts individually, consider keeping track of what you call 'out of pocket' costs: the initial $1000 and further sums you add from your own pocket. You can do this by keeping a spreadsheet with dates and amounts as you buy shares, or you can keep a separate asset account for each symbol/ticker in an accounting package. For the 3 shown in your table, you'd have 3 asset accounts, one for each. You'd then record the intentional ('out of pocket') purchases there. Either way, you can quickly get the total. Take that away from the reported "market value", and you'll have what you're after. In your case, with SWAGX:

• 'out of pocket' = $1000
• market value = $1000.06
• gain or loss = $1000.06 - $1000 = $0.06 gain

Note that this isn't an ideal accounting strategy. If you ever sell, it would be tricky to disentangle the 'out of pocket' units from the DRP-acquired units.

A more comprehensive solution would be to record each dividend as a revenue gain, and record each DRP investment as an additional (capital) investment. If you do this systematically, you can total up the dividends and invested capital separately using your spreadsheet or accounting package, and compare the difference with the reported market value. With SWAGX again:

• total dividends = $4.17
• total invested capital = $1004.17
• difference = $1000 (= total 'out of pocket' investments)
• market value = $1000.06
• gain or loss = $1000.06 - $1000 = $0.06 gain

This approach requires you to enter all those individual dividend amounts, which you'd rather not do. But if you can convince yourself to do so, you would have the raw data need to produce an after-tax gain or loss figure by adjusting for tax on dividends and tax on capital gains.

Answer 2

The dividends seem to be reinvested, at least for the last fund shown. Therefore, you are receiving the dividend, and in a non-tax-favored account, are responsible for taxes.

The cost basis is now the sum of your original investment plus the value of the reinvested dividend (or cap gains). This makes it possible to show a loss even though you feel you have more money than when you started.

In a tax deferred account, over time, my $1000 may grow to $2000 and I don’t care how it got there. In your case, the reinvested dividends over tome might have been $1100, and the $2000 balance might show a $100 net loss on the side.

Answer 3

When stocks and funds go ex-dividend, share price is reduced by the amount of the dividend/distribution. This creates a capital loss in your existing position in the amount of the distribution received. Your investment of $1004.17 (initial purchase plus reinvested dividend) has recovered 6 cents of that mark down. That's why on the far right it shows a loss of -$4.11. When share price appreciates to $9.77, the capital loss will have been recovered and your position will be worth $1,004.17 which represents the original purchase of $1,000 and the $4.17 that was reinvested.

The problem is that your broker isn't accounting for the dividends in the image that you posted. In order to track this accurately, you need to set up a spreadsheet with all of the variables. The columns would be:

(A) Shares Bought

(B) Total Shares (running total of column A)

(C) Buy Price

(D) Total Cost (A x C)

(E) Current Price

(F) Current Value (A x E)

(G) Gain/Loss (F - D)

(H) Notation column for (P)urchase, (S)ale, or (D)ividend

If so inclined, you can add any other columns that amuse you.

Your broker's monthly statement should include a complete breakdown of both capital gains and dividends received and reinvested. If displayed on separate pages, you may have to add the two to get the performance details.