Portfolio Turnover

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.)