Portfolio turnover, or turnover rate, measures the proportion of holdings sold or replaced during a specified period. In taxable investing, earlier sales realize capital gains sooner, reducing the period during which gains can remain deferred. Dividends and interest create a similar tax effect because they generate current taxable income. section 8.2
A projection can represent turnover as an annual percentage of the portfolio sold and reinvested in the same asset. The model uses average-cost accounting and combines turnover with returns, payouts, cost basis, and account-specific tax rates. A zero-turnover stock can defer gains, while a high-turnover stock realizes them earlier. section 8.1
Turnover changes asset location
A high-growth stock fund with a 4% turnover rate can occupy a middle position in tax efficiency: its higher return favors tax-advantaged placement, while turnover reduces tax efficiency. In a three-asset allocation containing large-cap stocks, high-yield bonds, and this fund, placing the fund in a Roth account produces the greatest tax savings among the relevant alternatives. section 8.3.1
Table 8.3 Typical attributes of various assets
| Type of asset | Average return | Payout rate | Tax rate payout | Turnover rate |
| Large-cap stocks | 8% | 1.5% | 0.2 | 0 |
| High-growth stocks | 9.5% | 1.5% | 0.2 | 0 |
| International stocks | 8% | 1.5% | 0.25 | 0 |
| REITs | 8% | 4.5% | 0.35 | 0 |
| Money market fund | 3% | 3% | 0.35 | 0 |
| Government bonds | 4% | 4% | 0.35 | 0 |
| High-yield bonds | 7.5% | 5.5% | 0.35 | 0 |
| Municipal bonds | 2.5% | 2% | 0 | 0 |
| Large-cap,high-turnover stocks | 8% | 1.5% | 0.2 | 0.2 |
| High-growth,high-turnover stocks | 9.5% | 1.5% | 0.2 | 0.2 |
Compare turnover, payout rates, returns, and payout-tax rates across large-cap stocks, bonds, REITs, and high-turnover stock categories. section 8.2
