If it's not performance, what is it?
Some investors believe that when they reinvest dividends or capital gains—meaning they use the proceeds to buy more shares of the investment—that distribution becomes part of their investment return.
But here's what really happens: When the distribution is reinvested, it's added to your cost basis. Although the money was "earned" on the original investment by way of a distribution, it's not considered part of the investment's performance. Instead, the number of shares you own increases, as does the cost basis for those shares.
For this reason, cost basis should be used only to calculate capital gains and losses for tax-filing purposes—not to measure performance.