Holding Period Returns

Stock indexes rising to new highs, again, in 2017 as they have since their inception, has somehow become controversial. Many voices, mainly by active managers on Wall St., have risen against stock indexes. The chorus is cautioning investors against index funds. This post will examine the returns and risks of stock indexes in more depth.

VFINX

As usual, let's start with the index you can buy, the Vanguard Investor Class S&P 500 Index Fund, VFINX:

Note there is a long history of new highs in the index, the Yahoo data begins in 1980. Note also there are ups and downs, its not a straight line up.

Holding Periods

This begs the question: what happens to investors when you buy the index? What is one's risk? What can one expect? To properly answer this question lets look at returns for a wide range of holding periods. A holding period assumes you buy the stock, hold it for the period, and then sell it.

What holding periods do we measure? Lets go with the standard set: 1 month, 3 month, 6 month, 1 year, 3 year, 10 year etc. etc. Here are the results:

The frequency chart above shows, for example, that VFINX had positive returns for a little over 60% of all 1 month holding periods. There are 9553 1 month holding periods since 1980, 6094 had gains, 3459 had losses.

Note that as we increase the holding period, the percentage of losses decline. This is expected in any bull market. Thus, historically, since 1980, 5529 3 month holding periods have had gains!

Below are the average ANNUALIZED returns for each holding period shown.

This data, we have to remember, starts with 1980 to present, an extraordinarily bullish period for equity markets. This includes the 300% gains of the Obama period and the +20% gains today. 

The table below shows the expected TOTAL RETURN and risk for short-term and long-term holding periods.

	1mo	3mo	6mo	1 yr
Average	0.8%	2.5%	5.0%	9.9%
Std. Dev.	4.6%	7.6%	11.0%	16.1%
Maximum	21.3%	34.1%	40.6%	54.4%
Minimum	-35.5%	-51.4%	-61.2%	-64.4%

3 yr 5 yr 10 yr 15 yr 20 yr 30 yr Average 30.0% 49.5% 104.0% 153.1% 201.9% 298.6% Std. Dev.  27.6% 35.4% 50.6% 56.2% 31.8% 11.5% Maximum 86.2% 125.2% 196.6% 263.9% 289.1% 331.3% Minimum -58.1% -43.0% -24.2% 53.1% 140.2% 262.2% Conclusion In any give year, investors have roughly a 40% risk of loss and 60% chance of gain. Yearly losses can easily exceed 20% (2 standard deviations) with an extreme of -60% in any given year.  This is why short-term investing is so risky!  5 year holding periods cut the extreme to a 40% risk of loss and the numbers only get better with time. Feel free to post comments. Disclaimer: The above is not investment advice, is for information purposes only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors.