For tax-paying shareholders of a mutual fund or other invesment portfolio, this term matters a lot. When you turn a portfolio over, it means that you are buying and selling securities...and presumably realizing taxable gains. So if in a given portfolio you have 100% turnover, it means that you likely have zero long-term gains, or will have traded it such that all of your gains have been realized. And taxed.
If you live in a blue state, and you hold shares of a mutal fund that had 100% portfolio turnover, and that fund was up, say, 12% this year, then after taxes, where you pay almost 50% ordinary income tax, and since all of the gains are short-term and paying ordinary income tax, that gain of 12% is just 6%. And that totally sucks in a market that was up 10% overall.
The high portfolio turnover (encouraged by brokers who take their 3-cents-a-share commission happily) destroyed your net after-tax returns.
Warren Buffett's style is pretty much the opposite. He has something like 2% portfolio turnover, as he buys things and holds them "forever" so that he never pays taxes in realizing any gains, and the stocks just sit there boringly and grow and grow and grow. And that's nice. (For his investors.)
Related or Semi-related Video
Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
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