Portfolio math

Realized vs unrealized gains: four numbers behind one percentage

An investor who says they are up 20% can mean several things. Up on what they hold now? Including the positions they sold at a loss and stopped counting? With or without dividends and fees?

The gap between the flattering version of your return and the complete version is one of the most informative numbers in a portfolio, because it shows how much of your track record has been left out of the tally. Splitting one percentage into its four parts takes a paragraph each.

This article explains the four parts, works through an example in which the same account is up 20% by one count and 9.35% by the other, and covers why the two smaller parts, dividends and fees, tend to go missing.

The four numbers in one percentage

Unrealized gain is the value of your current holdings minus what they cost you. It is paper profit, marked at today's prices and revised at every market open.

Realized gain is the profit and loss you locked in by selling. It is permanent, and it is the part that selective memory works on. Positions that were sold at a loss tend to disappear from the mental ledger.

Dividends are cash received. They are often left out of the up-or-down calculation altogether.

Fees are money that left the account with every trade. Your broker records each one. Most investors never add them up.

Your complete result is all four together, measured against everything you ever deposited, not only against the positions that are still open.

Why dividends and fees go missing

Dividends get omitted for a mundane reason. They arrive as cash, get spent or reinvested, and leave no trace on the positions screen where most people do their mental accounting. For an income-heavy portfolio, leaving them out understates the result by the full amount of the dividends. It is the one form of selective memory that works against you.

Fees have the opposite problem. Each one is too small to notice and the total is too tedious to add up, so nobody does. A tracker that sums them from your transaction history does the adding for you.

A worked example: 20% or 9.35%?

Suppose you have deposited €20,000 with your broker over the years. Your current holdings cost €14,000 and are worth €16,800 today. The positions screen says +20%. That is correct, and it answers a small question.

Now add the rest of the ledger. Unrealized gain on open positions: +€2,800. Realized losses from the positions you closed: −€1,200. Dividends received along the way: +€450. Fees paid: −€180. The net result is +€1,870 on €20,000 of deposits, which is +9.35%.

Both numbers are true. One describes the open positions. The other describes your investing. The €2,800 headline and the €1,870 total differ by the items the standard broker screen does not show, and no single missing item was large. Selective memory rarely works in dramatic sums, and in this example it worked €1,200 at a time.

If your own version of this exercise requires guessing at the realized column, that is a finding in itself. The record exists in your broker's transaction history. It has never been totalled, and doing that by hand takes an afternoon.

Survivorship bias in your own account

Brokers mostly show unrealized profit and loss on current positions. Close a losing position and it disappears from view. A portfolio of winners with a set of realized losses behind it looks the same as skill, unless something keeps the closed positions visible.

This is the same statistical trap that makes fund industry averages look better than fund investors' results, because funds that close are removed from the record. Here it is applied to your own account, and nobody decides to do it.

The interface shows open positions, memory prefers wins, and the two reinforce each other until the story and the ledger differ. The correction is a data source that does not forget, which is what your full transaction history is.

Why realized losses get left out

There is a reason the closed losses get buried. An unrealized loss still contains the possibility of recovery, and until you sell, no mistake has been made on paper. Realizing it turns an open question into a verdict.

The well-documented result is that investors sell winners too early, to bank the pleasant kind of certainty, and hold losers too long, to postpone the unpleasant kind. The realized column then fills with small banked wins while the large losses sit unrealized in the open positions, labelled as long-term holdings.

Separating realized from unrealized in your own records is how this pattern becomes visible. If your realized column shows forty modest wins and your open positions include three large paper losses from 2021, that pattern is the disposition effect.

Paper gains are wealth, but not settled

The opposite mistake exists too. Calling something only a paper loss, or only a paper gain, is half true. Unrealized numbers are your wealth, marked at today's prices, and you could realize them within minutes of the next market open. What they are not is settled.

Treating a paper gain as spendable income and treating a paper loss as no loss at all are the same error with different signs. Both confuse today's mark with a final score.

Unrealized profit and loss tells you where you stand today. Realized profit and loss plus dividends minus fees tells you what has happened so far. Both numbers are needed, and they need to be kept separate.

The tax line

Tax systems differ on when a gain becomes taxable, and several of them use the moment of sale. The rule that applies to you is on your tax authority's own site. The split matters here because it changes which number your records have to keep separate.

Tax rules are specific to each country and change often. A tracker's realized-gains figure, ours included, is performance bookkeeping. The broker's official tax report and the local rules decide what goes on a return.

What a complete screen shows

The fix is one screen that shows open positions with unrealized profit and loss, a list of closed positions with realized results, dividends received, and total fees paid. BullBenchmark builds that screen from your full transaction history, closed positions included.

The next question is comparative. Given everything, realized, unrealized, dividends and fees, did you beat an index fund? That is a separate calculation with its own pitfalls, covered in why benchmark your portfolio. It needs the complete ledger, because the index return includes everything that happened, and a fair comparison has to do the same.

In short

BullBenchmark reads the transaction export from your broker and shows your return next to the S&P 500 and the Nasdaq 100, fed with the same deposits on the same dates, in your own currency. The first two weeks are free and no card is needed.

Related: Average cost basis explained