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TURNOVER RATIO

investing wednesday word of the week Nov 20, 2019

Definition 
A portfolio's turnover rate measures the level of buying and selling of investments. You will typically see a turnover ratio when analyzing mutual and index funds. They are the same thing.

​Why It's Important
High turnover rates can lead to higher portfolio expenses. Not only that but usually, if a portfolio has a high turnover rate or ratio, the more taxes you will potentially have to pay. Once a position is sold out of the portfolio, you will either have a capital gain or a capital loss. A good advisor will attempt to make sure your gains and losses offset so that you will not have additional tax implications. But this is not always possible. Paying attention to the turnover rate is super important to avoid a tax headache later.

If you are investing in a taxable account, it is best to look for tax-advantaged funds or ones with low turnover. Tax-deferred or tax-free accounts (such as IRAs and 401ks) do not matter quite as much since you are not being taxed on the capital gains anyway. ​

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