{"id":2112963,"date":"2019-09-18T16:36:52","date_gmt":"2019-09-18T11:06:52","guid":{"rendered":"http:\/\/stockviz.biz\/index.php\/?p=2112963"},"modified":"2019-09-18T20:59:52","modified_gmt":"2019-09-18T15:29:52","slug":"portfolio-churn","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2019\/09\/18\/portfolio-churn\/","title":{"rendered":"Portfolio Churn"},"content":{"rendered":"\n

There is a famous scene in the “Wolf of Wall Street” where Matthew McConaughey (Mark Hanna) is explaining to Leonardo DiCaprio (Jordan Belfort) the concept of fugazi<\/em>:<\/p>\n\n\n\n

Mark Hanna: <\/strong>Number one rule of Wall Street. Nobody… and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet. Nobody knows if a stock is gonna go up, down, sideways or in f***ing circles. Least of all, stockbrokers, right? You know what a fugazi is?”<\/p>

Jordan Belfort: <\/strong>*Fugayzi*, it’s a fake.<\/p>

Mark Hanna: <\/strong>*Fugayzi*, fugazi. It’s a whazy. It’s a woozie. It’s fairy dust. it doesn’t exist. It’s never landed. It is no matter. It’s not on the elemental chart. It’s not f***ing real.<\/p>IMDB<\/a><\/cite><\/blockquote>\n\n\n\n

<\/p>\n\n\n\n

Gross returns of a high turnover portfolio is just that – fugazi.<\/p>\n\n\n\n

Assume that there is an investment strategy that produces 12% in gross returns every year. Notionally, $1 should grow to $3.11 in 10 years. However, even if you assume brokerage charges are zero, demat charges don’t exist and there are no other taxes whatsoever, STT – Securities Transaction Tax – will take a slice of the portfolio at every churn.<\/p>\n\n\n\n

A x600 churn, where 25% of the portfolio is replaced every month, will leave you only $2.94 in 10 years. A x1200 churn, where 50% of the portfolio is replaced every month – not uncommon with most momentum strategies – will leave you with only $2.79.<\/p>\n\n\n\n

\"\"
12% notional returns<\/figcaption><\/figure>\n\n\n\n

And STT is not the only tax that is paid on a direct-equity portfolio. Capital gains tax of 10-15% also apply. These taxes have a non-linear impact on a portfolio’s compounded returns.<\/p>\n\n\n\n

Investors should keep these in mind while comparing direct-equity portfolio returns.<\/p>\n\n\n\n

Also, mutual fund NAVs are net<\/strong><\/em> returns. It is highly inappropriate to compare gross direct-equity returns with mutual fund NAVs. <\/p>\n\n\n\n

Code for this analysis can be found on github<\/a>. You can play around with it on pluto<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

There is a famous scene in the “Wolf of Wall Street” where Matthew McConaughey (Mark Hanna) is explaining to Leonardo DiCaprio (Jordan Belfort) the concept of fugazi: Mark Hanna: Number one rule of Wall Street. Nobody… and I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet. Nobody knows if a stock is gonna … <\/p>\n","protected":false},"author":2,"featured_media":2089693,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[960],"class_list":["post-2112963","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-returns","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2112963","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=2112963"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/2112963\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2089693"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=2112963"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=2112963"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=2112963"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}