How to Calculate Portfolio Turnover
Thoroughly research every investment before sinking money in it. This is especially true for mutual funds and other stock portfolios that are professionally managed. In addition to performance and return, one important metric to consider is portfolio turnover. The portfolio turnover rate is the percentage of a fund's holdings that have changed hands within one year. It is used as a gauge for how long fund managers hold stocks. In addition to finding this metric in the prospectus, you can also calculate it yourself.
Other People Are Reading
Instructions
-
-
1
Calculate the turnover rate. Divide the fund's total sales or purchases by the average value of assets during the year.
-
2
Sum the total purchases for the entire year for the portfolio. Let's say your fund purchased $100,000 in new securities (assets) for the year.
-
-
3
Determine the average assets (securities or investments) in the fund on a monthly basis. You can find the monthly average by adding up the average balance of the last 12 months and dividing by 12. Let's say the average assets in the fund on a monthly basis over the last twelve months are $500,000.
-
4
Divide the purchase amount by the average assets for the turnover ratio. The turnover ratio is $100,000 / $500,000 or .2. This equals 20 percent (.2 x 100) and indicates that the fund manager holds the stock an average of five years.
-
1
Tips & Warnings
A portfolio with a turnover rate of 25 percent indicates that the fund manager holds the stock an overage of four years. In general, fund managers with a buy-and-hold strategy have a lower turnover rate and fund managers who trade based on short-term events have a higher turnover ratio.
