Portfolio Management - The Importance Of Realized Profit (Part 2)

Portfolio Management - The Importance Of Realized Profit

Portfolio's Balance Sheet

Current Value of stocks + Cash available for investing

= Injected Capital + Total Realized P&L + Total Dividends Received + Total Unrealized P&L

Sources that help to increase portfolio value

1. Injected Capital: Periodic injection of more capital; but this doesn't really help to improve your investing skills and experiences in the stock market. It only provides you with a feel-good factor.
2. Total Realized P&L: More frequent profit taking can help to increase the cash available to re-invest for compounding effect as it is much easier to re-invest the gains together with the recovered capital. It is always easier to buy with more money on hand.
3. Total Dividends Received: These are periodic and less frequent and it can also help to increase cash available to re-invest; but it is usually harder to achieve compounding effect for average retail investors with smaller capital base. It is lot harder to buy with less money on hand. For example, someone who has received $50K of dividend income will definitely find it easier to re-invest than one with $5K.
4. Total Unrealized P&L: These are just paper gains or losses that exist in the investors' mind and can't really do anything with it. Some days it makes you happy and other days it makes you sad.

Have you realized that depending on dividends alone is not enough to improve the portfolio's balance sheet, we really need more frequent realized profits and together with the capital recovered to re-invest them for compounding growth. So we need both!