Thinking ahead about how investing can support financial goals is the purpose of planning. Naturally, there’s lots of talk about common planning targets: retirement and college. But there’s also consideration of how to achieve multiple goals at various stages of life — whether covering basic needs or leaving a legacy — and how taxes and tax planning could impact results. Articles in the planning category allow you to clarify how today’s decisions can impact efforts to grow, manage, and maintain wealth.
An intriguing entrant to the robo-advisory arena is Acorns, an SEC Registered Investment Advisor. The idea behind this firm’s approach is to enable investors to “invest the change” (aka “acorns” or relatively small amounts of money) that will build over time into a sizable portfolio.
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?