Guest Author - Guido Deboeck


If you are new to investing, it is important you understand the difference between a portfolio rate of return and a mark-to-market rate of return. It is indispensable you learn this difference whether you manage your own portfolio or still work with a borker.

A portfolio rate of return is the sum of realized and unrealized gains or losses divided by the net asset value of the portfolio at the beginning of a given period, e.g. the beginning of the year. Realized gains or losses are those that result from transactions you have made in the market. Ther realized gains or losses are the difference between your sale price and the original purchase price after deduction of the commisions. The unrealized gains or losses are the difference between the current price of the holdings in your portfolio and the original cost. As realized gains/losses are taking into account in a portfolio rate of return, it is possible that the portfolio rate of return reflects gains or losses realized in previous years.

In contrast the mark-to-market rate of return compares the current net asset value of the portfolio with the net asset value at the beginning of the year. Hence it accounts only for the money made since the bginning of the year.

The two rates of return can be quite different and monitoring both of them is quite essential to know what your portfolio is doing relative to both the market indices and other portfolios or funds managed by professional investors over time. You can compare your mark-to-market rate of return with the relevant year-to-date performance of major indices; and can compare your portfolio rate of return over time with those achieved by professional managers.

If you still use a broker to manage your assets, make sure that when you are provide a rate of return that you ask how it was computed. Never take your broker’s word for granted as there are many ways your return can be inflated by end of quarter, or end of month rebalancing of your portfolio.

If you compute both rates of return on a regular basis you can also compute the difference between your rates of return and the indices or performance of funds. In this way you can keep track how much you are staying ahead of the market.

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