Turnover ratio of 20% is good.
Turnover ratio of 280% is not good!
Turnover ratio tells us the amount of buying and selling by the money managers inside of your mutual fund. We have some statistics on the turnover inside of the average mutual funds and they are not very good. When all funds are included it is estimated that over 280% turnover in 2008 was not uncommon! There are advisors that try to argue that “turnover is OK when it gets result”. That is a MYTH!
Why is turnover bad?!
It is expensive! There are transaction costs with every trade that robs you of returns in your investments. If your account is taxable, turnover creates higher annual tax liability. High turnover is an obstacle to healthy diversification. And finally, turnover suggests that your money manager does not have a long term strategy for your long term investment. It is possible that your money manager is looking for a new strategy after the dismal results of 2008 and they may be experimenting with your savings. Be informed!
