Author: Loveth Abu, Montecito Capital Management
Most investors measure their progress by the numbers staring back at them when they log into their Schwab account. It seems straightforward: if the market is up, your unrealized gains should clearly reflect that growth. Yet, many clients are surprised when those numbers appear underwhelming, or even disconnected from how well their portfolio has actually performed.
This disconnect isn’t a mistake, it’s the outcome of how brokerage platforms calculate cost basis, reinvested dividends, distribution adjustments, and years of compounding. What looks like “lower-than-expected” unrealized gains is often the result of healthy portfolio activity that’s working exactly as it should behind the scenes.
Understanding how Schwab reports performance versus how your portfolio truly grows can prevent confusion and help you interpret your account with more confidence and clarity. With the right perspective, investors learn to focus less on short-term snapshots and more on the total return story that truly drives long-term wealth.
The Hidden Driver: How Reinvested Income Changes Your Cost Basis
Every time your portfolio generates income — dividends, interest, capital gains distributions — and you choose to reinvest it, Schwab treats that reinvested amount as new money contributed, not as a gain.
This is the core reason investors often misinterpret the numbers.
Here’s what really happens:
- Your portfolio value increases
- Your cost basis also increases, because reinvested income becomes part of your principal
- As cost basis climbs, your unrealized gains look smaller, even though total growth is higher
Consider a simple example:
Start with: $10,000
Yearly dividend: $300 (reinvested)
Portfolio grows to: $10,918
Schwab shows:
- Cost basis: $10,300
- Unrealized gain: $618
Actual economic reality:
- Your portfolio grew $918
- But $300 of that was treated as a new investment, not a gain
This difference is intentional: it keeps your tax reporting accurate and prevents you from being taxed on money you reinvest rather than earned as profit.
Total Return vs. Unrealized Gain: The Most Overlooked Distinction
Many investors unknowingly compare two metrics that are not designed to match:
Unrealized Gain = Market Appreciation on Original Dollars
Total Return = Market Gains + Reinvested Income + Compounding
Total return is the true measure of long-term portfolio success, but Schwab’s default view highlights price movement only – which is why long-term investors often underestimate their true growth.
How Unrealized Gains Get “Suppressed” Over Time
Long-term portfolios produce significant reinvested income. Over 10–20 years, these reinvestments become a massive portion of your cost basis, diluting the unrealized gain figure even as your wealth compounds.
10-Year Illustration
(Assuming 6% growth + 3% reinvested income annually)
- Starting portfolio: $100,000
- Ending portfolio value: ≈ $230,800
- Total cost basis (after reinvestments): ≈ $145,500
- Schwab unrealized gain: ≈ $85,300
- True investment growth: ≈ $130,800
This example highlights the biggest misconception:
Your portfolio can more than double even while unrealized gains appear “modest.”
Why? Because a significant portion of your growth was added back into cost basis through reinvestments, not counted as profit.
Why This Is Actually Good for You
While some investors initially feel disappointed seeing “small” unrealized gains, the mechanics behind it provide three major benefits:
- Tax Accuracy
Reinvested income is not taxed as capital gains– and Schwab’s cost-basis adjustments ensure you’re never over-reporting taxable profits.
- Clearer Long-Term Planning
Total return — not unrealized gain — influences:
- Retirement income
- Withdrawal strategies
- Asset allocation decisions
- Inflation-adjusted projections
By separating reinvested income, Schwab helps you avoid confusing tax principal with actual profit.
- Reinforced Compounding Discipline
Reinvested dividends are one of the most powerful forces in wealth building.
Decades of reinvested distributions can account for over 50% of total return.
Lower unrealized gains mean your portfolio is compounding, exactly what long-term investors want.
Behavioral Mistakes That Come From Misreading Unrealized Gains
When investors misinterpret what Schwab shows, they often fall into traps such as:
- Assuming their portfolio is underperforming
- Switching strategies unnecessarily
- Reducing market exposure during drawdowns
- Ignoring the power of reinvested income
- Failing to evaluate performance correctly
This is why professional guidance matters: your platform provides data, but it doesn’t interpret the story for you.
Understanding Your Portfolio the Right Way
To properly evaluate performance, shift attention from unrealized gains to these key indicators:
- Total Return (the full growth picture)
Includes dividends, interest, distributions, reinvestments, and market appreciation.
- Inflation-Adjusted Return
Shows whether your money is actually gaining purchasing power.
- Withdrawal Impact
Identifies how distributions affect long-term sustainability.
- Portfolio Efficiency
Reveals how well your allocation converts risk into return.
When you evaluate the right metrics, the picture becomes accurate, not distorted by cost-basis mechanics.
Building a Clearer Investment Narrative
Just like retirement planning involves understanding hidden costs, investment performance requires understanding hidden mechanics. Unrealized gains only tell one part of the story. The deeper truth lies in how reinvestments grow, how income compounds, and how your cost basis evolves through time.
A comprehensive view means:
- Recognizing compounding as your engine
- Understanding Schwab’s reporting nuances
- Tracking total return instead of price return
- Realizing reinvested income elevates cost basis
- Accepting that long-term success rarely shows up neatly on a single line item
This is where thoughtful financial oversight makes a difference.
Where Montecito Capital Management Adds Value
A trusted advisor ensures you’re not just watching numbers; you’re interpreting them correctly, aligning them with your goals, and making decisions rooted in clarity rather than confusion.
At Montecito Capital Management, we focus on:
- True total-return analysis
- Inflation-adjusted portfolio planning
- Tax-efficient reinvestment strategies
- Multi-asset portfolio construction
- Withdrawal optimization for retirees
- Clear, personalized performance explanations
Instead of reacting to misleading account snapshots, you move forward with a structured, informed understanding of your portfolio’s true progress. With the right perspective — and the right partner — you gain confidence in your long-term financial trajectory, knowing that your portfolio is growing exactly as designed.
At Montecito Capital Management, we don’t just help you invest — we help you interpret, plan, and stay prepared for every stage of your financial journey.
Reference
Charles Schwab Corporation. (n.d.). Understanding unrealized vs. realized gains. Schwab Learning Center. https://www.schwab.com/learn
Charles Schwab Corporation. (n.d.). How Schwab calculates investment returns: Account performance reporting guide. https://www.schwab.com
Internal Revenue Service. (n.d.). Capital gains tax and basis reporting. https://www.irs.gov
Investopedia. (n.d.). Unrealized gains and losses: Definition and examples https://www.investopedia.com/terms/u/unrealizedgain.asp
Morningstar. (n.d.). How performance reporting works for long-term investors. https://www.morningstar.com/articles
U.S. Securities and Exchange Commission. (n.d.). Investor bulletin: How to read an account statement. https://www.sec.gov/investor
Bogle heads. (n.d.). Internal rate of return (IRR) vs. time-weighted return. https://www.bogleheads.org/wiki