4/06/2015 - This April Don't Be Fooled by Your Brokerage Statement
Melville, NY -- (ReleaseWire) -- 04/06/2015 -- "Don't judge a book by its cover and your investment performance by its brokerage statement!" cautions Keith Lanton, President of Lantern Investments.
Lanton warns that investors continue to inaccurately assess the performance of their investments, especially around this time of the year, tax season, when they review their 1099 Form.
Ahead of the April 15 tax-filing deadline, brokerage firms mail to their clients the 1099 Form, which lists proceeds from the sale of each security executed during the previous calendar year. The form features among others a "cost basis" column recording the original price paid for each security held in the portfolio. The difference between the cost basis and the price at which the investment was liquidated represents a realized gain or loss.
"When reviewing the 1099 Form, most individuals erroneously rely solely on the realized gain or loss figures to assess the performance of their investments," states Lanton. He explains that this is a mistake as it leads them to quickly conclude that if they invested $10,000 in a security four years ago and received $13,000 when they sold it, the $3,000 total return generated made this a good investment. Conversely, if the sale yielded only $9,000, the investment was not a good one. After all, money was lost.
"The surprising and very often unobserved reality is that despite the loss the not good investment may have produced a higher return-on-investment than the good one!" adds Lanton. "How can this be possible when the $1,000 investment loss was clearly spelled out in black and white in the 1099 Form and plainly listed every month in the unrealized gain & loss column of the brokerage statement?"
Lanton provides the following explanation. Unquestionably, 1099 Forms and the unrealized gain and loss information featured in brokerage statements are accurate. However, investors must realize that it is "only accurate" for determining how much an investor "owes" in taxes in the case of a realized gain, or, "may owe" in the case of an unrealized gain. The following comparison of two hypothetical scenarios will provide a better understanding:
Investment one: An investor purchases a mutual fund at $10 per share on January 1st of year one; the fund declares a $1.50 per share capital gain each year for four years. The investor sells the fund at the end of year four at $9 per share.
Investment two: An investor purchases a stock on January 1st of year one at $10 per share and sells it at the end of year four at $13 per share. Results: The realized loss on the mutual fund investment is $1,000 and the realized gain on the stock is $3,000.
Return on Investment: While the stock investment produced a 30% return ($3,000/$10,000), the mutual fund investment despite its loss generated a 50% return ($5,000/$10,000). The $5,000 gain/return is comprised of $6,000 in realized and paid capital gains ($1,500 per year for 4 consecutive years) minus the $1,000 loss incurred, due to the mutual fund's price drop from $10 to $9.
Lanton points out that in reviewing a hypothetical 1099 Form featuring the two assumed examples above, most investors would without a second thought wish their adviser had never bought the mutual fund and instead bought more of that stock. "However, there is a distinction with a difference," Lanton continued. "Investors must realize that the information contained in the 1099 Form and in the unrealized gain & loss column of their brokerage statement list ONLY the current status of taxable gains and losses. That information does not necessarily, and often doesn't, reflect investment performance. Dividends, interest and capital gains earned in prior years are not exhibited in this year's 1099, nor are they factored into the statement's unrealized gain or loss column."
Lanton concluded by offering the following advice, "Investors who are not consciously aware of this distinction will consistently continue to incorrectly evaluate the performance of the securities in their portfolios. This in turn will lead them to implement crucial decisions, such as what to buy, sell or hold, based on an inaccurate analysis of their investments."
About Lantern Investments, Inc.
Based in Melville, NY, Lantern Investments, Inc. is a wealth management firm that educates and guides multi-generational clients to achieve their financial goals by managing risk, growing assets and preserving wealth. The firm has offices in Westbury, NY, Chicago, IL, Houston, TX, San Francisco, CA and Hoboken, NJ. For more information call (631) 454-2000 or visit https://www.lanternwealth.com
About Keith Lanton
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