How to Assess A Portfolio Turnover Rate

Before you invest, be sure to assess the turnover rate of a portfolio. This measurement calculates how often assets in the portfolio are traded by the investment managers. Evaluating turnover rate is a key part of sound investment management.

Difficulty:

Moderate

Instructions

How To Assess A Portfolio Turnover Rate

1. Locate the total net asset value of the portfolio for a given year. This information is located at the end of the portfolio's prospectus.

2. Note the total amount of purchased assets over the same year.

3. Note the total amount of assets sold over the same year.

4. Assess the last two results and take the lower amount.

5. Divide this number by the total net asset value of the portfolio determined in step 1. This result is the portfolio turnover rate.

Tips & Warnings

• To properly assess an investment, remember that the higher a portfolio turnover rate, the higher the transaction costs and taxes. A wise investment requires the benefits of a portfolio's assets to outweigh the total expenses. This means a portfolio with a high turnover rate would have to contain superior assets in order to avoid reducing overall returns.

• Portfolios that emphasize long-term growth, like retirement funds or equity income funds, are more likely to have low turnover rates. Riskier portfolios that require active management generally have higher turnover rates.

• Firms include their pre-calculated portfolio turnover rate in the prospectus. This is usually found in the "Financial Highlights" section, at the back of the portfolio's prospectus.