The impact of portfolio turnover on investment returns

Portfolio turnover is the rate of change of investment holdings within a portfolio.

Whether it is a mutual fund, your own stock portfolio, or a portfolio managed by your financial advisor, the frequency that investments, particularly equity investments, are changed inside a portfolio over a given year is called annual portfolio turnover rate.

Annual turnover statistics are required to be published in the prospectus of Canadian mutual fund companies. AIC is in compliance with this requirement for all of its mutual funds.

Why does portfolio turnover matter? In one word – taxes.

Each time an equity investment is sold, a tax liability may be triggered on accrued capital gains.

Frequent buying and selling of your investments results in less capital working on your behalf because of the constant drain from taxes being paid.

Research has shown that portfolio turnover can destroy one’s after-tax investment results. Lack of attention to portfolio turnover can cost investors up to 5% in annual returns. This means that a 9% return on an after-tax basis may be as little as 4%.

You would be better off maintaining a non-registered portfolio with low investment turnover, allowing your excellent investments to grow tax-deferred for the long term.

This approach is known as a buy-and-hold strategy.