Taking Turnover into Account: Optimize Your Portfolio

“Turnover” is a way to measure the amount of trading activity in a portfolio. It is expressed as a percentage and represents how much of your portfolio is bought and sold over a certain period of time.

Typically, portfolio managers look at annual turnover, which is calculated by first identifying the percentage of the portfolio value that is bought and sold over the course of the year. Once those values are identified, the lesser of the two is taken as the turnover since any value left in cash is excluded from the calculation. For example if a portfolio with a value of $100 sells out of $30 of stock and buys $25 of stock leaving $5 in cash over the course of a year, the portfolio has 25% annual turnover.

Turnover control is the act of managing the frequency of buying and selling assets within a portfolio to optimize returns. Higher turnover can incur higher fees that eat into overall returns and sometimes can result in more short-term capital gains. Conversely, higher turnover can sometimes be beneficial by allowing the portfolio to capitalize on shorter-term market opportunities, such as reacting to market volatility.

At Pave, we regularly assess whether the benefits of higher turnover outweigh the costs. We conduct a thorough analysis to strike a balance between:

• recommending more trades to keep your portfolio updated with optimized holdings
• holding onto assets to prevent unnecessary trading and incurring higher fees

We do this by optimizing your portfolio on a monthly cadence and by taking turnover into account when we build recommended trades.

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