Why Holding Period Matters


“Holding period” – a critical concept to understand in the world of investing. It’s a major factor influencing the returns you hear about from your friend, CNBC, prominent investment firms, and all other investors.

What exactly is a “holding period”? 

Put simply, a holding period is the length of time an investor holds a particular asset before selling it – whether it’s for 5 years, 10 years, or 30 years. Holding period has direct implications for taxes, investment strategies, risk management, and performance evaluation.

Asset allocation, which involves how you distribute your funds among various asset classes such as stocks, bonds, and cash, is the single most important factor which influences investment returns. Aside from asset allocation, holding period is likely the most significant determinant of what your return on investment will be. Understanding this concept and its implications is essential for informed decision-making. 

Why does holding period matter? 

In the equity market(s), the duration you hold onto your investments significantly impacts your outcomes. Generally, the longer your holding period, the tighter your results tend to become. Some people refer to the stock market as a “gamble”. This can be a correct descriptor IF your holding period is very short (1 day-1 year). Generally, the longer your time horizon in the stock market, the greater your chances of walking away with more than you started. The stock market works over time and those that tell you otherwise probably didn’t give it enough time to work its magic. The chart below illustrates this principle: the longer the holding period, the better your odds of seeing positive results from your diversified stock portfolio.

Source: Ben Carlson, A Wealth of Common Sense 

Side note: though day trading and/or swing trading can be fun, it very rarely can consistently produce returns above the historical average of the market over an investing lifetime). The data says so. 

Another common assertion you might have heard from a friend or advisor, “The U.S. stock market averages ≈10%/year”. This is true in a sense, but not in the way people often use the phrase. The U.S. stock market, as measured by the CRSP 1-10 Index, is not going to return 10% each and every year – that’s one thing I can say with certainty. It’s actually more likely that the index does not return 10% in any given year. As shown below, historical data since 1926 reveals a wide spectrum of positive and negative returns.

Source: Dimensional Fund Advisors – The Rewarding Distribution of US Stock Market Returns

So now what?

What should you do with this newly learned information about holding period? That’s up to you! 

Let’s get practical and conclude with a few applicable ideas. 

Make a robust investing plan and stick with it. Don’t fall for the “quick tips” from finance personalities or shows. Invest for the long term and don’t try to time the market. 

Economic factors, market sentiment, corporate earnings, monetary & fiscal policy, geopolitical events, and technological advancements all can influence your potential returns in the equity market(s). But outside of your actual investment’s allocation, the holding period is the ultimate determinant of returns. Remember – holding period matters! 

Johnson is a fee-only, fiduciary financial advisor at Branning Wealth Management. He provides hands-on, practical financial advice for millennials, young families, and those starting out in their working careers. 

Looking for a financial advisor? Let’s talk. Schedule a complimentary consultation today!

Disclaimer: This information does not constitute an offer to sell or a solicitation of an offer to buy any securities or investment strategy and is intended for informational purposes only. Investments are subject to market risk, including the loss of principal, and the investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices, in general, may decline over short or extended periods. The information contained does not take into account any investor’s specific individual investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting, or tax advice, or a representation that any investment or strategy is suitable or appropriate. Information in this report has been obtained from sources deemed to be reliable, and is not guaranteed.  The above information is subject to change without notice.

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