Portfolio Turnover, What It Is and Why It Matters

I learned a harsh lesson about portfolio turnover during a recession. I was forced to pay capital gains taxes on distributions of a long-term mutual fund holding, even though I didn’t sell any fund shares and even though the fund value had dropped more than 20% that year.

This experience taught me about portfolio turnover and related expenses, including taxes (along with the generally wise and tax-efficient approach of purchasing mutual funds for tax-advantaged accounts, not taxable ones). Since then, I have paid more attention to this notion, not in fear of turnover but recognition of its potential costs and benefits.

So, what is portfolio turnover and why does turnover matter?

What is Asset Allocation?

When I’ve read about investing and considered the services of investment advisory firms, I’ve often encountered the term of asset allocation.

What is asset allocation? A simple definition: it’s putting my proverbial eggs in multiple, uncorrelated baskets. For an investor, this process involves allocating investments among the big three types of asset classes: equities, fixed income instruments, and cash and its equivalents.