Annual Turnover

An annual turnover is what you are supposed to do with your bed mattress to make sure it doesn't become a cheap roadside motel for mites. In finance, it's the amount that an investment firm sees its holdings change-over from one year to another.

Investors put money into a mutual fund or other investment vehicle, which then buys stocks or other investments with that money. The managers of the fund look for opportunities, buying stocks that seem like potential winners and selling stocks that don't seem to have much more upside.

In the fund's annual report, this buying and selling gets boiled down to the annual turnover figure. It is given as a percentage rate and gets computed in relation to the amount of money the fund has under management.

The rate of turnover will depend on the type of fund. Index funds (or funds meant to track a particular group of stocks, like the S&P 500) will have very low turnover. Actively traded funds (where the fund managers are explicitly trying to beat the market with aggressive trading...and good luck with that, as almost nobody ever does, over time) will have very high turnover.

Higher turnover can lead to higher expenses for the fund...lots of commissions paid when you buy and sell stocks, meaning that investment gains have to be that much higher just to overcome the higher costs of trading.

The bigger issue? Taxes. Each time you sell for a gain, you incur a tax on that sale so most tax paying investors (i.e. if they own the fund in their personal account versus an IRA) don’t like high annual turnover in their investments.