Here’s how to find out.
The number one most important thing to know about your investments is whether or not they are actually making money. (In this case, I’m referring to investments in the stock market in a brokerage account. So, stocks, mutual funds and bonds.)
Now, you may be wondering, why do I bother to mention such an OBVIOUS thing? The answer is because it is totally not obvious.
How can that be? Don’t you just, like, check your account statement and see if the amount in your account has increased?
Well, kind of… but not really.
Here’s the thing. The number one most important thing you want to know, “Are my investments making money?” is not actually listed on the monthly statement. And for some reason, account statements are not easy to understand. In fact, I once spent over an hour on the phone with a very nice woman from TD Ameritrade, asking about my statement and how to read it, and even she had to consult her manager three times. Some of the terms were not easily understandable. In other words, not even the bank knew WTF half the shit on the statement meant.
I am not sure why this is. You’re already a customer, and you’re investing, so why be obtuse? I think it’s probably just the way that accountants/bankers/finance folks are used to approaching these numbers, so that’s how it’s presented to you. But what we really need here is a translation.
Here it is.
On your monthly statement, you’ll see the previous account balance, the current account balance, and the difference between the two. So, easy, aren’t we done? Well, no, because the difference between these two numbers does not take into account the amount of money you contributed to the account. If you just look at the current balance and the previous balance and the difference between the two, you’ll see an increased balance (hopefully) just due to the contributions you made, not necessarily the amount that the investments made. Your contributions can mask the losses or underperformance of the investments.
Let’s look at a fun example. Let’s say you open a new account in January, and put $30,000 into it, which you then invest in stocks, mutual funds and bonds. You deposit $500 per month, and now it’s the end of the year and you want to know if you made any money.
Here is a table you can use to work this out. All of the info in columns 1-5 can be found on your account statement.
Column 1 shows the month of the account statement.
Column 2 shows how much money you contribute to the account each month.
Column 3 shows the current account balance for that month. (Column 3 reflects the increased or decreased value of your investments in the stock market, due to the changes in stock price over the month. For example, if you own 1 share of Tesla, and the stock price increased $10 last month, then your account balance will increase by $10.)
Column 4 shows last month’s balance.
Column 5 is the difference between the current month’s balance and the previous month’s balance. Can’t we stop here? Isn’t this what the investments earned? Nope…
But wait! There’s more. This brings me to Column 6. This is where it’s at. Column 6 holds the most important information you need to know about your investments: whether they are actually making money! This is the amount in column 5, subtracted from your contributions. BAM!
The Math:
Column 5= This is the Difference Between the Two Monthly Statements: The current month’s balance – last month’s balance.
Calculation: Column 3- Column 4.
This tells you how much the amount of money in the account increased (or decreased) over the past month. **This is not how much your investments actually earned (or lost)!**
Column 6= THIS is how much your investments actually earned in the past month! It’s the Amount the Investments Earned in the Past Month MINUS your Monthly Contribution.
Calculation: Column 5 – Column 2.
| 1 | 2 | 3 | 4 | 5 | 6 |
| Month | Your Monthly Contribution | Current Balance | Last Month’s Balance | Difference Between the Current Balance and Last Month’s Balance | How Much Your Investments Actually Earned |
| January | 30,000 | 30,000 | n/a | n/a | n/a |
| February | 500 | 30,855 | 30,000 | 855 | 355 |
| March | 500 | 31,355 | 30,855 | 500 | 0 |
| April | 500 | 31,855 | 31355 | 500 | 0 |
| May | 500 | 33,560 | 31855 | 1705 | 1205 |
| June | 500 | 34,000 | 33,560 | 440 | -60 |
| July | 500 | 34,250 | 34,000 | 250 | -250 |
| August | 500 | 34,750 | 34,250 | 500 | 0 |
| September | 500 | 34,800 | 34,750 | 50 | -450 |
| October | 500 | 35,300 | 34,800 | 500 | 0 |
| November | 500 | 35,450 | 35,300 | 150 | -350 |
| December | 500 | 35,850 | 35,450 | 400 | -100 |
| Annual Totals | 35500 | 35,850 | n/a | 5850 | 350 |
The last column is the most important one. This is the one that shows you the actual amount of money your investments earned (or lost) that month, without your contributions. Your contributions make the balance go up, or they offset the amount of loss that your investment sustained.
Either way, your contributions mask the performance of the investments, and make the account balance look better than it might be. You can see that the difference between column 3 and 4 reflects a gain every month, even if there was no gain (broke even: March, April, August, October) or if there was a loss (June, July, Sept, Nov, Dec). So the contributions hide the real deal/what’s really going on, which is loss.
Let’s look closer at some important details. If you look at column 3, it shows an increased balance every month. (yay! You’re killing it.). If you look at column 5, this reflects that continued gain, because the balance goes up every month, and so every month the difference between the two shows a gain. (yay! You’re killing it.). But hold-up: Column 6 shows what really happened. It shows that you had losses in June, July, September, November and December. (oh no!). That’s right, you had losses, despite your account balance increasing. (WTF?) And in March, April, August and October, you broke even. (dang). In fact, you only had gains in two months this year: February and May. (huh).
At the end of the year, you look at your finishing balance, and wow! You’ve made 5,850! But wait, how much did you contribute? $5500. So, great, you did make money—you made $350! Um, is that good? How do you know? That’s the next important question you need to answer.
Return on Investment (ROI):
Here’s how you decide: you compare the rate of return on your account investments to a benchmark. I like to use the S&P 500 index as a benchmark, because I think of it like this: if I did absolutely nothing but invest all my money into one S&P 500 index account, would I have done better or worse than what I currently have?
Well, let’s see what the Return On Investment was: I put in $30,000 + $500 each month, for a total of $35,500. I earned a total of $350 over 1 year.
ROI=0.99%.
ROI = (Total increase in balance – Cost of Investment)/Cost of Investment
ROI = (35,850-35,500)/35500= .99%
How Do You Know if You Made Enough? Compare it to Something.
Is that good? Well, what can we compare it to? The S&P 500 index.
On average (adjusted for inflation, and over the entire existence of the US stock market) the S&P return is 7% per year. So my $30,000 plus $500 each month ($35,500) at 7% over 1 year would have made $2,086 for a total account balance of $37,586. The ROI=5.88% (The reason the ROI doesn’t equal 7% is that I didn’t start with $35,500, I gradually added to it over time. If I had started with $35,500 and earned 7% on it all year, then the ROI would equal 7%.)
So here’s how it stacked up: I tied up $35,550 for 1 year to make $350, with whatever investments were used here, whereas if I had just put it in an S&P 500 index fund, I would have made $2086. These investments clearly underperform compared to the S&P.
Is My Investment in Line With My Goals?
Now’s the part where you ask yourself if this result is in line with your goals. I think we all know the answer for this example. Whatever mutual funds, stocks and bonds this account is invested in are dog shite, and should be changed.
So now you can see how it looks like you’re making money on your investments, but you’re not; or you’re making money, but at a much lower rate than you could be.
The time that your money is tied up in a bad investment is time that your money could have been tied up elsewhere, gaining more money. (This lost opportunity represents Opportunity Cost, something I’ll write about in another post.)
Look at your brokerage account statement. How easy is it to find the information you’re looking for?
