A holding period return (HPR) is the total amount of return that is generated due to holding a particular asset or a group of assets. That return is based on the amount of time that the assets are in the possession of the investor. This approach is considered one of the easiest ways to assess the performance of investments, since it makes is possible to easily compare returns from one asset or group of assets with the returns generated in past periods of the same duration. Doing so makes is easier to determine if those assets are yielding relatively consistent returns, or if something has changed during the current period that may necessitate the sale of one or more of those holdings.
Calculating the holding period return usually involves dividing the amount of income and capital gains by the value of an identified initial period. This makes it possible to express the growth or decline in terms of a percentage. It is possible to use this calculation with just about any type of asset or group of assets, including stocks or bonds. Investors can even calculate the holding period return on an entire portfolio, assuming that there has been no real turnover in the assets contained within that portfolio for at least a couple of periods. This makes it possible to use the portfolio value during the first period as the initial period value.
Determining the holding period return is helpful when it comes to deciding whether to hold onto the asset for a little longer, or to sell off any asset that is beginning to show signs of decline. Since the HPR pulls into sharp contrast the difference in value from one period to the next, the investor is alerted to the possibility of issues that may be signs of an emerging trend. This allows the investor to look closer at the reasons for the decline and determine if they are likely to continue driving down the value of the asset in subsequent periods. If so, the investor is likely to consider selling off the asset. If the factors are deemed to be short-term and there are signs the asset will recover in the upcoming period, the investor may choose to hold onto the asset for a little longer.
While helpful, the holding period return is not the only strategy that an investor will use as part of the maintenance of an investment portfolio. The calculation does provide clues regarding the performance of the assets held, either in terms of generating a steady increase in value or beginning to experience some sort of decline. Investors will still want to monitor market conditions, shifts in consumer demands, and other factors that can influence market movements over the short-term and long-term before actually deciding whether or not to sell a particular asset.