Understanding & use of "Out of Pocket" calc method

[lite1]

I'm new to FM but have enough exp with it to realize that any feature or approach incorporated is typically well thought out and can be a useful tool to analyzing a portfolio and/or specific investment. I understand the OOP definition but fail to grasp why it is useful and/or how people use this (perhaps versus looking at tax cost basis); hence I conclude that I am missing something.

Manual states " ... how much money has come out of your pocket. These figures are useful in understanding your overall break even point." Hypothetical example of portfolio with sub-portfolio A and sub B; each funded with cash of $100,000 on the same date and recorded as a Transfer In with both tax cost basis and OOP of $100k. Each sub port has several mutual funds where dividends and any other cash distribution (ST, LT) is automatically re-invested in new shares of the same mutual fund.

My normal thinking would be: I create a boundary around each portfolio so that I know what has gone into it from outside (from pocket), and what I have withdrawn from it (back to my pocket). Dividends that occur create a choice point for me: a) keep it in portfolio and if so does it go into money market, the same investment that distributed it, or a different non-MM investment; b) take the cash out to my pocket and perhaps live on it, or perhaps on the same day, or a day later decide to transfer it into a different investment portfolio. The boundary around a portfolio and tax cost basis are important for doing taxes; for looking at performance (time weighted and asset weighted).

With FM, if I have dividends automatically be re-invested my OOP for that investment remains the same, but my tax cost basis increases. Am I correct that from this point of view, my breakeven point is lower on the Y axis on a graph? If yes, this is what is confusing to me. Given the choice points I list in prior paragraph, even though the portfolio is "outside my pocket" I am still making choices and if re-invest from my own thinking I am choosing to have more skin in the game of that investment.

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With the two sub-portfolios, say after a year I decide that the investment strategy of port A would be better for the upcoming time frame than port B and therefore choose to transfer say $20k from recently sold investment from port A to Port B. Should this be handled as a transfer out and a transfer in? What happens to the notion of OOP for each portfolio?

My ?s and examples might not be the best way for me to grasp this concept so feel free to cut my learning curve in a different manner.

One of the things that at this point I do not like about my little understanding of OOP is that like most things in FM, tax implications are ignored. While div reinvestment increases my tax cost basis in an investment and therefore would reduce any cap gains tax when it is sold in the future; OOP cost basis for the same inv does not give one a chance for noticing this and evulating that outside of FM. Also the cash dividend is going to require a tax payment and again I need to decide whether to allocate my taxes when I do them to each portfolio by withdrawing cash from them to cover the tax burden that the portfolio had created. I don't want to go too far down the road of before and after taxes performance evaluation, but simply want to understand whether OOP makes me more blind to tax issues using FM, and if so how people reduce this downside of OOP.

Ok, enough, I am not clear enough about where I am confused to ask a decent question.

[Mark]

Hi lite1,

With FM, if I have dividends automatically be re-invested my OOP for that investment remains the same, but my tax cost basis increases. Am I correct that from this point of view, my breakeven point is lower on the Y axis on a graph?

Yes, this is correct. When you reinvest a distribution, that does increase your tax cost basis, but it doesn't change your OOP cost basis. The OOP basis is useful for understanding your overall break-even point, independent of tax considerations. If you want to know your tax basis, you can view that in a Custom report, or in the Portfolio Editor.