I was reading some Jack Bogle again recently and he raised the concern of significant portfolio turnover in mutual funds. While I understand the concept and general concern (research doesn’t indicate that an increase in buying and selling brings about improved results – the opposite is generally true), I decided I wanted to know how much did my portfolio turnover in 2016?
Investopedia says that portfolio turnover “is calculated by taking either the total amount of new securities purchased or the amount of securities sold – whichever is less – over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period.”
To calculate my portfolio turnover, I will use the amount of securities sold. I am in the midst of transitioning from an investment strategy that focuses on purchasing individual stocks to one where ETFs make the core of my portfolio. This means that as securities I hold reach a sell price I am comfortable with, I have been moving the capital into ETFs. And this has also meant that there are more sell transactions in my account then usual.
I reviewed my account history and it turns out I sold 11 securities over the course of 2016, with a total value of $54,203. (Interestingly, $31,791 or nearly 60% of that total, was from the sale of 4 securities). The closing value of my discount brokerage account at the end of 2016 was $247,190. When I divide the value of sales ($54,203) by the total value at year end ($247,190) I get the portfolio turnover number 22%. This means that in 2016 the average holding period for a security in my account was just less than 5 years.
Not bad, but it could be lower. If you haven’t figured it out already I am of the camp that believes less buying and selling is better (less transaction fees, consistent with investment research, etc).
That said, 22% is a heck of a lot better than what you see in most mutual funds, which is closer to 100%. And considering that I am in the midst of a significant (once in a lifetime?) transition shifting from stocks to ETFs, I am comfortable with that number.
My guess (and hope) is that the portfolio turnover will continue to fall as there fewer stocks to sell over time. For 2017, I should be able to cut the turnover number to between 10-15%. Feel free to keep me accountable to that.