Holding period is the length of time an investor keeps a given investment.
Buying and selling investments is a normal part of managing an investment portfolio. Some investments one might choose to own for years or decades. Other investments might be held for days, weeks or months.
Keeping track of the length of time is important. The only way to compare two investments is to calculate their respective returns over the same period of time.
For instance, mutual funds track their performance against a benchmark, such as an index of stocks or bonds. They report quarterly and annual returns and then compare that to the same period for the index.
Those three-month and 12-month spans are the holding period for comparison purposes.
Warren Buffett, the famously successful investor and philanthropist, is often quoted as saying “Our favorite holding period is forever.”
It’s a bit of a misquote, so here’s the entire thing from his 1988 letter to shareholders in Berkshire Hathaway:
In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.
What Buffet means is that a good company is worth keeping, while a bad company should be sold quickly. That’s the opposite of the typical investor behavior, who sells when companies report good numbers but hangs on to losers no matter how bad things get.
It’s remarkably difficult to understand the difference between winners and losers in the stock market. More than a few companies have gone from dominating their industry to bankruptcy in just a few years. Others that seemed doomed have battled back.
That’s why Buffett often counsels investors to use index funds instead of trying to pick stocks. In his view, the index is as good a way as any to sort winners from losers over time.
Index construction is an ongoing process. Many of the big names of the S&P 500 and the Dow Jones Industrial Average are on longer traded. Firms that were startups just a decade ago today make up a significant portion of these same yardsticks.
Owning the index instead provides solid exposure to growth while limiting the risk of being wrong. Diversification, ultimately, is a safety in numbers approach.
Index investing also has the advantage of being cheaper than paying a mutual fund manager to pick stocks for you. Ultimately, the market itself sets your holding period, giving you a reliable return at a much lower cost.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.