Turnover matters  
Two mantras of Vanguard's John Bogle are costs matter and turnover matters. We've looked at the former in Can you afford to invest in mutual funds?. To get a better appreciation of how much turnover matters, Morningstar "Fund Spy" Peter Di Teresa looked at the relationship between turnover and the returns of USbased US equity funds. He found that the average equity fund had an annual turnover of an astounding 87%. That means the fund manager replaced 87% of the fund's assets with new stocks each and every year. Then he looked at the 5year compounded annual return of funds with turnovers at least twice the average, less than half the average and less than onequarter of the average. Here are his results.
Note the roughly 2½% per year difference in returns. You bet turnover matters! From The Indexer's Secret 17Jun99
