The amount of time an investor holds on to their investment — particularly the period between the purchase and sale of any security or group of securities — is known as a holding period. When one takes a long position, the holding period references the duration between the subsequent sale and initial purchase of an asset. On the other hand, in a short position, the holding period refers to the amount of time for which a short seller chooses to repurchase or buy back their shares versus when the security is finally delivered to its lender thereby closing the short position.
In the word of investing, the acronym HPR is often used when it comes to analyzing one’s portfolio. HPR stands for holding period return. Here’s everything you need to know about this metric, how to calculate it, and what it can be used to ascertain.
What is holding period return?
The period of holding or yield is the total return that is received from holding a portfolio of assets or a singular asset over a period. It is typically expressed in the form of a percentage value. Holding period returns are calculated. The holding period return is calculated by using the total returns from either the asset or the portfolio. Hence, it is calculated by considering the asset/portfolio’s income as well as any change in value. Holding or Return yield is typical of use when comparing the returns between investments that have been held for different time periods.
Holding Period Yield Formula
HPR calculators exist online so you can instantly know your annualized holding period returns with the click of a button. However, the formula to calculate HPR will better illustrate what it means. The holding period formula is as follows:
HPR = [Income + (End of Period Value — Initial Value)] / Initial Value
Any returns that are computed for regular time periods like quarters, half years or years, can be converted as per their holding period return as well.
Hence, holding period return is, therefore, the total return that is received as a result of holding one’s portfolio of assets or individual assets for a certain period of time, and is typically expressed as a percent value. It needs to be calculated by inputting values of the total returns from the portfolio or asset like its income including any changes in income value. Holding period yield is also particularly helpful when one is attempting to compare the returns between investments that are held for different time periods.
Holding Period Yield Example
Beginning on the day that follows the security’s acquisition and proceeding onward till the day of its sale or disposal, the holding period also determines any tax implications. As an example, take the following. Sunil purchased a hundred shares of X stock on January 2nd back in 2016. As he continued to determine her holding period, he began counting on 3rd January 2020. Regardless of the number of days contained in a month, the third day of every month after was counted as valid.
Suppose that Sunil ended up selling his stock on December 12th, 2020. He would then have to realize short-term capital gain or loss as his holding period was less than one year. If Sunil were to have held onto his stock for another month and sold anywhere after 3rd January 2021, he would have to deal with long term capital gain or loss as his holding period has reached or exceeded a year.
Although you can find automatic HPR calculators online, this formula is simple enough for you to calculate HPR yourself. Take the following examples and try to calculate HPR accordingly.
Firstly, if an investor purchased shares in a stock a year ago at ₹50 and ended up receiving dividends worth ₹5 over a year, what will the HPR be if the stock is now trading at ₹60.
HPR= [5+(60–50)] / 50= 30
Hence HPR will be 30% for this particular holding period.
As a second example, take the following. You can even use HPR to figure which of two investments performed better during the same holding period. Let’s say fund X appreciated from ₹100 to ₹150 over three years while giving an investor ₹5 in dividends. Alternatively, find Y went from₹200 to ₹320 over four years, while generating dividends worth ₹10 during this time.
HPR for X = [5 + (150–100)] / 100 = 55%
HPR for Y = [10 + (320–200)] / 200 = 65%
Hence, it appears to be the case that fund Y outperformed fund X with respect to its holding period. It is crucial to note here that fund Y was held for four years which contributed to its higher HPR than fund X. This also brings us to a drawback of holding period yield. Although it is an excellent metric to gain insight into one’s returns over a specified period, when comparing the returns across different holding periods, it cannot be used on its own. To figure out which fund performed better when both funds have different holding periods, one needs to employ the use of annualized holding period return or holding period yield.
In the aforementioned example, as both holding periods differ, one will have to also calculate the annualized holding period return to compare the returns while checking for the time period held. The calculation of annualized holding period yield for fund X yielded a value of 15.73%, while that for fund Y yielded a value of 13.34%. Therefore, despite its HPR being higher, the annualized holding period yield for fund Y was lower than that of fund X.