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Gains vs. loss: what a ‘loss’ really means

When it comes to your investment portfolio, performance is a result of the combination of holdings (gains and losses)—but what does a ‘loss’ mean exactly?

It means the market value (current price) of a fund’s units has dipped below its book value (the price at which you originally invested in the fund plus any added distributions, referred to as the ‘adjusted cost base’).

Does a ‘loss’ mean that you’ve lost money?

No, because as long as you don’t sell the investment(s) in question, a ‘loss’ is ‘unrealized’.

For example:

  • Let’s say you purchase units in the ‘XYZ Fund’ at $5 a unit
  • Then suddenly the price falls to $2 per unit—but you hold onto them
  • Your next investment report will show an unrealized loss on this fund of $3 per unit
    (because it’s $3 less than when you first bought it)
  • A loss is only ‘realized’ when an investment is sold below its adjusted cost base

If you hold an investment that pays distributions more frequently (such as a Money Market, Bond, and/or Mortgage and Income Fund), those distributions can make the loss/gain more apparent.

But don’t distributions reflect earnings, which is a good thing?

Yes—however, those distributions get added to the book value if you’ve chosen to reinvest them.

For example, let’s say you invest $10,000 into a mutual fund at a book value of $10 a unit (=1,000 units)—this fund then pays a distribution.

Here’s how the distribution will affect your original ‘book value’:

 

 

Activity

 

 

Transaction Summary

 

 

 

Units Owned

 

 

Adjusted Cost Base

(or ‘Book Value’)

 

 

 

Market Value

 

 

 

Original purchase

 

 

 

Purchase of 1,000 units
x $10/unit

 

 

 

1,000

 

 

 

$10,000

 

 

 

$10,000

 

 

Unit price rise

 

 

Units rise to $11/unit

 

 

1,000

 

 

$10,000

 

$11,000

 

Distribution declared

 

 

Distribution of $0.3636 per unit ($400) which is taxable in a non-registered account

 

 

 

 

 

 

 

 

 

Distribution reinvested

 

 

If the distribution is reinvested, you buy more units at $11 per unit for your $400 (which means you now have 36.36 more units). Adjusted cost base rises
by the amount of the reinvested distribution.

 

 

 

1,036.36

 

 

 

$10,400

 

 

 

$11,399.96

 

 

 

Unit price falls

 

 

 

Price per unit falls to $10.03 due to market conditions

 

 

 

1,036.36

 

 

 

$10,400

 

 

 

$10,394.69

 

As you can see from the above chart, while the difference between the book value and the market value would show a small loss, you’ve actually made $394.69 on your original investment.

‘Tax-loss selling’—where a loss (on non-registered accounts) can offset any capital gains.

If you have any taxable capital gains to declare from non-registered investments, you may benefit from selling an investment with a reported capital loss to offset those gains. That applies to losses you’ve had in the same calendar year, or up to 3 years back. Just note that tax-loss selling is not applicable with registered accounts (RRSPs, RESPs, TFSAs), as tax consequences are sheltered. However, there is a caveat to tax-loss selling you should be aware of in the form of the ‘superficial loss’ rules in Canada. These rules may apply if an investment is sold to realize a loss (and/or the ‘same or identical’ property) is acquired within 30 days of the sale—in which case the capital loss may be denied.

Learn more about Canada’s superficial loss rules.

At the end of the day, investments are subject to market forces beyond anyone’s control, causing them to move up or down in value.

Different types of investments (different asset classes of investments) do not always move in the same direction at the same time. That’s why diversification within a portfolio is so important. You can never predict changing market conditions, but being diversified helps lessen the potential impact of market volatility.

Still have questions about gains, losses, or other performance-related matters where your own portfolio is concerned? Click here to be connected with your Educators financial specialist.

 

Plus here are some other investment-related topics you may also be interested in boosting your financial literacy on:

Why bond prices fall when interest rates rise

Mutual funds 101: The top 6 questions you should ask before buying a mutual fund

Socially Responsible Investing: What it is and why it matters to education members

 

 

Above chart purely for illustration purposes only

The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.

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