What it means
Investors often look at price changes alone, but that tells only part of the story. A share that rises by 5% and pays a 3% dividend has delivered more than one that rises by 5% with no payout.
Holding period return adds income and price movement into a single figure. The calculation is straightforward.
Take the ending value, subtract the starting value, add any income received along the way, and divide the result by the starting value. The answer can be positive or negative, and it applies to any period, from a day to many years.
Because the period can be any length, returns on different holdings are not directly comparable unless the length is taken into account. A 20% return over ten years is far less impressive than a 20% return over one year.
To compare fairly, analysts convert the figure to an annual rate, which is a separate step and a different measure. Businesses use the measure to judge the results of surplus cash invested in securities, pension portfolios and strategic stakes in other companies.
It is also used to evaluate performance of a fund manager over a defined period, for example from the date a mandate started to the date of review. For these purposes a consistent definition matters, so the treatment of fees and taxes should be agreed beforehand.
Cash flows in the middle of the period complicate things. If money is added or withdrawn partway through, the simple formula no longer measures the skill of the investment, and more advanced approaches such as time-weighted returns are needed.
Holding period return works best when there are no major additions or withdrawals. The nuance is that it is a backward-looking number.
It describes what happened over a past period and does not say anything about risk, so two investments with the same return can have very different levels of volatility along the way.
In practice
Real-world examples
Example 1
A company invests $500,000 of spare cash in a bond fund. After 18 months it is worth $520,000 and has paid $15,000 in income, so the holding period return is (520,000 - 500,000 + 15,000) / 500,000 = 7%.
Example 2
A founder reviews her stake in a start-up bought for $200,000. Three years later the stake is valued at $260,000 with no income paid, so the holding period return is 60,000 / 200,000 = 30%.
Example 3
A pension trustee compares two funds over five years. One returned 40% and the other 55%, but the second involved greater risk and a change of manager, so the committee looks at the risk before preferring it. The trustee also asks both managers to restate their results after fees so the comparison is fair.
Think of it
Imagine baking a loaf of bread. You put in flour, yeast, and water, and after a set time in the oven, you measure the final loaf size plus any extra treats you baked alongside it, compared to what you started with.
Formula
Calculation
Holding period return = (ending value - starting value + income received) / starting value x 100
Suppose an investor buys shares for $10,000, receives dividends of $300 during the year and sells for $10,800. The price gain is 10,800 - 10,000 = $800. Adding the dividends gives 800 + 300 = $1,100 in total. Holding period return = 1,100 / 10,000 = 0.11, or 11%.Case study
Seen in the real world
Linden Park Furniture is an illustrative, fictional company that invested $1,200,000 of seasonal surplus cash in a portfolio of short-term bonds and shares. After 20 months, its treasurer reported to the board that the portfolio was worth $1,296,000 and that it had received $24,000 of income.
The holding period return was (1,296,000 - 1,200,000 + 24,000) / 1,200,000 = 120,000 / 1,200,000 = 10%. A director pointed out that this covered 20 months, so it could not be compared directly with the bank's annual deposit rate.
The treasurer converted the figure to an annual rate, which was a little over 5%, and added a note on risk to the paper. The illustrative lesson is that holding period return is a clean summary of what happened, but it needs the time period and the risk attached before it can guide a decision.
Watch out
Common mistakes
- Ignoring dividends or interest and measuring only the change in price, which understates the true return.
- Comparing holding period returns over different lengths of time as if they were annual figures.
- Using the simple formula when large sums were added or withdrawn partway through the period, which distorts the result.
Questions
People also ask
Is holding period return the same as annual return?
No, it covers the whole time the investment was held, whereas an annual return restates the result as a yearly rate.
Can holding period return be negative?
Yes, if the fall in price is larger than any income received, the result is a loss. For example, a $10,000 holding that falls to $9,000 with $200 of income has a return of minus 8%.
Does it include fees and taxes?
Only if you deduct them, so it is best to state clearly whether the figure is before or after costs. Reports that mix gross and net figures across holdings are very hard to interpret.