Investors may find that knowing about the holding period return helps them compare their returns among investments they’ve held for varying amounts of time.
Holding Period Return vs. Holding Period Yield
Sometimes you’ll hear the holding period return referred to as the holding period yield. These two terms have very similar meanings and serve the same basic function. Jeremy Britton, CFO of investment management firm Boston Trading Co., told The Balance by email that yield relates to the income from an investment (for example, a bond, stock, or property) and not the growth in asset price. “We would, therefore, see the holding period return as a broader measure and a fairer measure,” Britton said. “It may be possible for a stock to pay a very good yield, but have a lower price growth.” An example would be two investment properties each purchased for $100,000: One takes in $1,000 per month in rent and does not rise in value, yielding $12,000 in rental income in a year. The other property earns only $800 per month in rent but rises in value by 10%, leading to a gain of $19,600 for the year—and making it the better investment of the two.
How Do You Calculate the Holding Period Return?
To calculate the holding period return, you add the income earned plus the ending value of the investment (Vn) together and subtract the beginning value of the investment (V0). Then you will take that calculated number and divide it by the beginning value of the investment (V0), as shown in the formula below.
How the Holding Period Return Works
According to Britton, a holding period return equation is useful for comparing the total return of an asset over time with that of another asset over time. For instance, he explained that because we rarely buy two different stocks on the exact same day, it can be useful to test whether stock ABC, held for two years, was a better performer than stock XYZ, held for three years.
What It Means for Individual Investors
While calculating the holding period return can be a valuable tool for individual investors looking to evaluate their investing efforts, it doesn’t always tell the whole story. They also should take other factors into consideration when evaluating the success of an investment. According to Britton, quantitative numbers can hide many qualitative factors. “For example, horse-and-buggy stock did better than Ford Motor stock for the first two to three years, and MySpace outperformed Facebook [now Meta] for the first two years," Britton said. “As the holding period return is a backward-looking instrument, it should be evaluated as much as we use the rear-vision mirror, and in the context of a wide windshield to see what is coming up next.”
Limitations of the Holding Period Return
As Britton mentioned, the holding period return is a backward-looking metric, which can cause problems. “It can confirm existing biases or cause investors to stay stuck in the old ways when new technology emerges,” Britton said. While he believes that the holding period return is a useful tool, it is not the only one you should depend on. He suggests using it sparingly and continuing to look forward.
