Holding Period Return/Yield

Triston Martin

Nov 02, 2022

A return on the holding period is the overall return you earn on assets you own for an extended period, which is referred to as the holding period. This return is almost often presented in the form of a percentage. The overall returns on the assets or portfolio are used as the foundation for calculating this percentage. In other words, you consider both the revenue and any increases or decreases in value. Investors could find that knowing the holding period return makes it easier to compare the returns they've received from assets they've kept for various periods.

Difference Between Holding Period Return and Holding Period Yield

You could also hear people talking about the holding period yield instead of the holding period return. These two terminologies have meanings that are pretty close to one another and perform the same fundamental purpose. According to Jeremy Britton, the Chief Financial Officer of the investment management company Boston Trading Co., who spoke with The Balance through email, yield refers to the income that is generated by an investment (such as a bond, stock, or property), and not the increase in the asset price.

Britton said, "we would, therefore, consider the holding period return as a larger measure and a fairer metric." It is feasible for a company to have lesser price growth yet still pay a very excellent dividend. This scenario is plausible. For example, consider the following two investment properties, each of which was acquired for $100,000: If the property's value stays the same. Still, the rent continues to be $1,000 per month, and the total rental revenue for the year will be $12,000. The second piece of real estate generates a rental income of just $800 per month, but its value increases by 10% over the year. This results in a gain of $19,600 over the year, making it the superior investment choice of the two.

How the Holding Period Return Works

According to Britton, a holding period return equation helps compare the total return of one asset with that of another support over time. This comparison may be made by contrasting the two assets' holding periods. For example, he noted that because we seldom acquire two different stocks on the same day, it might be beneficial to assess if stock ABC, held for two years, was a stronger performer than stock XYZ, kept for three years. This is because we rarely buy stocks on the same day.

You may evaluate the performance of the various stocks and mutual funds in your portfolio by comparing their holding period returns to determine which has been more successful over time. You may also use the calculation to compare the performance of your investment portfolio (or a single investment) to the performance of the appropriate index to determine whether or not you would have been better off owning an index fund.

What It Implies for Those Who Invest on Their Own

Calculating the return over the holding time may be a helpful tool for individual investors who want to analyse the effectiveness of their investment efforts; nevertheless, this metric alone does not necessarily provide the whole picture. When determining whether or not an investment was successful, they need to consider various other aspects.

"For instance, horse-and-buggy stock fared better than Ford Motor stock for the first two to three years, and MySpace beat Facebook [now Meta] for the first two years, but Facebook has now surpassed MySpace in terms of overall performance ", Britton remarked. It should be examined just as much as we use the rear-vision mirror, and in the context of a broad windshield so that we can see what is coming up next."

Limitations of the Holding Period Return

  • As was pointed out by Britton; the holding period return is a statistic that looks into the past, which may lead to various issues.
  • Britton says this phenomenon "may reinforce existing prejudices or encourage investors to remain locked in the old methods when new technology comes."
  • Even while he considers the return on keeping an investment for a long time to be a valuable tool, he cautions that you should not rely on it exclusively. He recommends limiting how often you use it and keeping your focus on the future.
  • when in reality, history has shown that these investments paid massive returns in the subsequent period. This comparison may be made by contrasting the two assets' holding periods. For example, he noted that because we seldom acquire two different stocks on the same day.

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