During the ebbs and flows of market pricing, many investors take a deep breath and
close one eye when opening their monthly or quarterly investment statements. The
apprehension can be overwhelming for some. This month’s article is written to educate
readers about the difference between a bank statement and an investment statement.
Why do we react much differently when we open our bank statements versus our
investment statements? Instead of ‘taking a look under the hood’, let’s ‘take a look at
what’s in the envelope.’
The purpose of a bank statement is to summarize all transactions that have occurred
within a bank account over a specified period of time. The statement includes deposits,
withdrawals, transfers, fees, interest earned, and the beginning and ending balances for
the period. The primary focus of the bank statement is to identify the cash movement
within the account. As an example, on April 1st, you had $10,000 in your bank account;
over the month, you had transactions of -$1,000; then, on April 30th, your new account
balance would be $9,000. Because the bank account focuses on the movement of cash
only, you, as the owner, have experienced a $1,000 loss in your account’s value.
This is vastly different from what occurs in an investment statement.
An investment statement provides an overview of the activity and holdings within a
brokerage account over a specific period. An investment statement includes details
about investments, such as the number of shares, current value, changes in market
value, dividends, interest, and capital gain distributions. The primary focus of an
investment statement is to provide the owner with the current value of what their
assets are selling for on the open market. The statement takes a snapshot of the
pricing of the assets at the end of the day the statement is generated. The next day
the assets may be priced higher or lower, so the account’s value is always changing.
As an investor, you own the assets listed on the statement. You only experience a
gain or loss on your original investment when you decide to liquidate (sell) the assets.
As an investor, a good rule of thumb is not to react impulsively. Selling when the
market is down means you might lock in permanent loss and miss the recovery. The
key is to stay in the market for the long haul and not try to time the market. Be patient,
tune out the daily ups and downs of the market, and stay focused on your long-term
goals.
A prudent investment approach is to have a portfolio of equity positions in companies
you are proud to own, balanced with quality bonds, treasuries, or cash-like equivalents
that match your tolerance to market contractions and expansions.
Remember, your bank statement tracks the cash flow in and out of the bank account,
but your investment statement reports what you could have sold your assets for at the
closing of the day the statement was generated.
Michael Wallin, Certified Financial Planner ™. For more information, please see www.panthrex.com
