Investors often ask us how often they should sell investments they own and buy new ones. The answer: as rarely as possible. That’s because turnover in your portfolio cuts into your profits.
Here are three costs you face every time you buy and sell a stock:
Brokerage commissions: Every transaction you make in your portfolio involves brokerage commissions or similar costs, even if these costs are hidden or built into the price you pay or receive.
Losses to the bid/ask spread: If you want to carry out a transaction right away, you have to accept the highest available “bid,” or pay the lowest “offer.” You can enter your own bid or offer. But this means you have to wait for another investor who is willing to do business at your price. Meanwhile, prices could move against you.
Taxes: If you sell at a profit in your taxable account (outside your RRSP or tax-free savings account), you usually have to pay capital gains taxes.
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How to trade stocks: Portfolio turnover by the numbers
To measure your portfolio turnover, add up the value of all the investments you bought during the year and all the investments you sold. Next, add the beginning and year-end values of your investment portfolio. Divide the first number by the second.
For example, say you sold $24,000 of investments in 2010. You held on to $4,000 to pay capital-gains taxes, and bought $20,000 of investments. That’s a total of $44,000. Your portfolio is worth $55,000 at the beginning of the year and $62,000 at year’s end, for a total of $117,000.
Now divide $44,000 by $117,000. The result: 37.6%. That means you replaced an average of 37.6% of your portfolio in 2010. That’s on the high side. Many successful investors have portfolio turnover of 25% or less a year—often much less.
Our stock advice: It pays to seek out stocks that you might want to hold on to indefinitely. You’ll change your mind on some of them, of course. But you’ll hold others for decades, and these stocks will give you your biggest profits.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
This privacy policy is applicable to all TSI Network Visitors, Clients, Employees, Suppliers, Web sites, Management, and all other interested parties. Any links to or from our site are not covered by this policy. We encourage you to read the privacy policies of every site that you visit.
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We do not collect or disclose personal information, except when it is provided to us voluntarily by the site/store visitor with their consent.
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We are continuously in the process of improving our sites and services. If any new features or policies require a change to this current policy, we will post a clear notice of this change on pages of our site where the privacy policy appears. The principle behind this privacy policy is to collect information with your knowledge and consent.
What personal information do we collect?
The information we receive from customers helps us personalize and continually improve your online experience at TSI Network. TSI Network may collect personal information online for all legal purposes, which include, but are not limited to:
Information You Give Us: We receive and store any information you enter on our website or give us in any other way through sign-up forms or ordering forms for publications and services. You can choose not to provide certain information, but then you might not be able to take advantage of many of our services and features. We use the information that you provide for such purposes as responding to your requests, customizing your web browsing experience for you, improving our website, and communicating with you.
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Does TSI Network Use the Information It Receives?
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TSI Network does everything possible to prevent unauthorized intrusion to its websites and the alteration, acquisition or misuse of personal information by unauthorized persons. Notably passwords submitted by users of our websites are encrypted using encryption mechanisms. However, TSI Network cautions visitors to its websites that no network, including the Internet, is entirely secure. Accordingly, we cannot be responsible for loss, corruption or unauthorized acquisition of personal information provided to our websites, or for any damages resulting from such loss, corruption or unauthorized acquisition.
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Changes to this Policy
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TSI Network may revise this Policy from time to time.
Legal Notices and Disclaimers
The contents of this web site and our publications are based upon sources of information believed to be reliable, but no warranty or representation, expressed or implied, is given as to their accuracy or completeness. Any opinion reflects the Successful Investor’s judgment at the date of publication and neither the Successful Investor, nor any of its affiliated companies, nor any of their officers, directors or employees, accepts any responsibility in respect of the information or recommendations contained in the publications or on this web site. Moreover, the information or recommendations are subject to change without notice.
Information presented on this web site or contained in our publications is not an offer, nor a solicitation, to buy or sell any securities referred to on the web site or in the publications. The material is general information intended for recipients who understand the risks associated with an investment in any securities referred to in the publications or on this web site. The Successful Investor has made no determination regarding whether an investment, course of action, or associated risks are suitable for the recipient.
