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Churning can cost you money.

The word "churn'' might conjure images of dairy farms and milkmaids, but there's another kind of churning -- it's financial, and it can hurt you. That kind of churning is when a financial professional engages in excessive trading (buying and selling) ostensibly on someone's behalf, often generating commissions for himself and usually not serving his client very well. This churning results in billions of dollars lost each year.

Many stockbrokers are paid based on the number of trades they make in your account, not how well that account performs. (This explains the cold calls that can interrupt your dinner, as some broker tries to sell you on an "amazing opportunity.'') Even if your broker is good and has you invested in growing companies, she might still be moving you out of one good company and into another too frequently. Each transaction results in a gain for the brokerage -- regardless of how it fares for you.

Churning is also a problem in the mutual fund industry. Fund managers are often so pressured to beat the market over short periods that they can't simply be patient with solid investments that are temporarily doing poorly.

Mutual funds that buy and sell frequently have what is called a high "turnover rate.'' Unsurprisingly, funds with the highest turnover rates tend to underperform their less active counterparts. After all, lots of buying and selling generates lots of commission expenses, which are borne by shareholders.

Finally, we individual investors ourselves sometimes engage in churning if we have short attention spans or are just impatient.

Churned investors are hurt not only by excessive commission costs, but also taxes. So selling appreciated stock before you need to or should can cost you more.

In your financial life, keep the cost of churning in mind.
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Title Annotation:Business
Publication:Telegram & Gazette (Worcester, MA)
Date:Oct 13, 2013
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