High Turnover Means Leaking Costs

Turnover rate is the ratio showing how much of a portfolio's assets were swapped out over a certain period (usually one year). Simply put, it's a number that shows 'how often I bought and sold what I hold.'

A common calculation used in the fund industry is this. By the U.S. SEC standard, you take the 'smaller' of the amount bought and the amount sold during a year and divide it by average net assets.

Turnover = (the smaller of buys and sells ÷ average net assets) × 100

A turnover of 20% means you swapped only about one-fifth of your assets in a year, and 100% means you essentially replaced the entire portfolio once over a year. Above 200% means you flipped the whole thing over more than twice a year.

Every time you buy and sell, hard-to-notice costs leak from three places.

First, trading fees. A brokerage fee attaches each time you buy or sell. Fees have dropped a lot these days, but the more often you trade, the more dust piles into a mountain.

Second, the bid-ask spread and market-impact cost. There's an invisible loss each time—buying a bit more expensively and selling a bit more cheaply.

Third, taxes. Especially in markets like the United States where short-term and long-term capital gains tax rates differ, realizing a gain by selling within a year applies a heavy short-term rate of up to 37%, whereas holding longer applies a lower long-term rate of 15–20%. The more often you sell, the more the tax 'drag' pulls down your return.

According to one asset-management analysis, a high-turnover portfolio can see its annual return shaved by roughly 1–2 percentage points from trading costs and taxes. It looks small, but compounded over decades, the results diverge greatly.

This isn't a hunch—it's confirmed by large-scale data. A famous representative is the study 'Trading Is Hazardous to Your Wealth' by professors Barber and Odean at the University of California, who analyzed the actual trades of over 66,000 individual-investor households at a major brokerage from 1991 to 1996.

The average household turned over about 75% of its portfolio a year, and their annual average return was below the market index. In particular, the most actively trading group managed only 11.4% a year, while the market index posted about 17.9%, lagging by more than 6 percentage points.

A follow-up study by the same researchers, 'The Behavior of Individual Investors,' is even more dramatic. The most actively trading top 20% had an average annual turnover of about 258% (flipping the whole thing over more than twice a year), yet their real return net of costs was roughly 6–7 percentage points lower each year than the least-trading group.

The conclusion is simple. Trading more didn't earn more—rather, they earned less because of costs.

The answer isn't 'don't trade at all.' Some trades are essential, like rebalancing to realign your asset allocation. The key is 'reducing unnecessary trades to stop the leaking costs.'

If you've picked good assets, holding them for the long term is more advantageous cost-wise than frequently switching, swayed by news or emotion. This site, 'The Return of Almost Everything,' was built precisely to answer that question—'if you'd bought good assets for a long time, steadily, how much would they be worth now?'

Even for the same asset, you can directly check via simulation how the results of lump-sum versus steady recurring investing differ, and what happened when you held long through a crash. The screen shows not only returns but also the maximum drawdown, loss duration, fees, and exchange-rate effects together, without hiding them.