What is the holding period return?

The holding period return is the total return received by an investor from holding an asset or a portfolio of assets. The period during which these assets are held is known as the holding period.

Definition and Examples of Holding Period Return

The holding period return is the total return you receive from holding assets over a specific period of time called the holding period. This return is typically expressed as a percentage. This percentage is calculated based on the total returns of the assets or portfolio. In other words, it looks at the income plus changes in value.

Holding Period Return vs. Yield Period Return

Sometimes you may hear the holding period return referred to as the yield period return. These two terms have very similar meanings and serve the same fundamental purpose.

The yield period return represents the rate of return. This includes all the interest and profits you receive during the holding period. However, this benefit must be actually realized on an investment in a bond.

Jeremy Breton, CFO of Boston Trading Investment Management, said in an email to The Balance that returns relate to the income from the investment (for instance, a bond, stock, or property) and not to the appreciation of the asset price.

There are two examples of investment properties purchased for $100,000: the first generates $1,000 a month in rent and does not appreciate in value, yielding $12,000 in rental income for the year. The other property earns only $800 a month in rent but appreciates by 10%, resulting in a gain of $19,600 for the year – making it the better investment of the two.

How to Calculate Holding Period Return?

To calculate the holding period return, you add the earned income plus the final value of the investment (Vn) together and subtract the initial value of the investment (V0). You then take this calculated number and divide it by the initial value of the investment (V0), as illustrated in the formula below.

How Does Holding Period Return Work?

According to Breton, the holding period return equation is useful for comparing the total return of an asset over time with the last return of another asset over time. For example, he explained that since we rarely buy two different stocks on the exact same day, it can be useful to test whether stock ABC, held for two years, performed better than stock XYZ, held for three years.

You can use the holding period return to compare different stocks or mutual funds in your portfolio to see which has performed better over time. You can also use the equation to test your portfolio (or a single investment) against the relevant index to see if you would have been better off just owning an index fund.

What Does This Mean for Individual Investors?

While calculating the holding period return can be a valuable tool for individual investors seeking to evaluate their investment efforts, it doesn’t always tell the whole story. They should also take other factors into account when assessing the success of an investment.

According to Breton, quantitative numbers can mask many qualitative factors.

“For instance, horse and buggy stocks outperformed Ford Motor shares for two to three years, and MySpace surpassed Facebook (now Meta) for the first two years,” said Breton. “Since the holding period return is a tool that looks back, it should be evaluated as much as we use the rearview mirror, and in the context of the broad windshield to see what is ahead.”

Limitations

Holding Period Return

As Britton mentioned, the holding period return is a backward-looking measure, which can lead to problems.

“The holding period return can reinforce existing biases or cause investors to get stuck in old ways when new technology emerges,” Britton said.

While it is believed that the holding period return is a useful tool, it is not the only tool you should rely on. It is suggested to use it cautiously and continue to look to the future.

“The holding period return might suggest that holding Apple or Microsoft stocks was a bad idea from 2000 to 2002, or that holding Amazon or Bitcoin stocks was a bad idea in 2015, while history has shown that these investments generated huge returns in the subsequent period,” according to Britton.

Source: https://www.thebalancemoney.com/what-is-the-holding-period-return-yield-5187173