The Pros and Cons of Buy and Hold

The expression “buy and hold” is often mentioned in the equity markets. This means you buy a stock or a mutual fund and hold it for extended periods. It is a logical view as there is a growth component in the equity markets as an economy or firm may grow larger over time. However, what does that holding period look like over time when viewing portfolio metrics? A second question asks, what does an investor experience when they buy and hold alternative investments? Indices of both asset classes are examined, and the results are shown below.

Background:

The motivation for this question is derived from holding any investment for various periods, what is the historical experience of doing so, and will it impact portfolio allocation decisions? Ibbotson and Kaplan (2000) conclude about 90% of a fund’s return variability is explained by asset allocation suggesting asset allocation policy is an important variable to consider.[1]

The holding periods are defined as the following durations of rolling periods: Monthly, three months, six months, 12 months, 24 months, and 36 months. This implies for each rolling period, what was the maximum return, the average return, and the largest loss during each rolling period.

Figure 1 notes the changes in maximum returns, minimum returns, and average returns of the S&P 500 Index (SPX)and the BarclayHedge Managed Futures (CTA) Index from January 1980 to April 2020. As any equity index is a portfolio of stocks, the managed futures index is a portfolio of managed futures funds. The four decades of data include economic expansions, contractions, bubbles, high-interest rates, low-interest rates, and many other events.

Study Summary:

A few points to note from this study:

  • The longer the positions are held, the larger the maximum return and average return for both indices. Similar to the results found with managed futures (Abrams, Bhaduri, & Flores, 2014).[2]
  • The maximum return of managed futures always exceeds the maximum return for the S&P 500 in every holding period.
    1. This may be due to the positive skewness of managed futures return distribution at 2.54 indicating positive return outliers versus the -0.64 skewness of SPX over the 40 years.
  • In the rolling 24 and 36-month periods, the average return begins to see a small premium of the SPX relative to managed futures.
  • The SPX experienced larger minimum returns as the rolling duration expands from monthly data (-21%) to 36 months (-43%). Whereas the managed futures minimum return in those same periods stayed relatively stable from monthly (-10%) to 36 months (-9%).
    1. The largest managed futures minimum returns are 3 and 6 months of -14% & -13%. The data suggests holding the investment for these short periods has potentially more downside variance.
    2. The negative skewness of SPX is an indicator of the negative return outliers.

 

Figure 1

Figure 2 examines the periods from a risk management perspective. If you look only at the downside of each holding period, the data suggest a growing differential between drawdowns of the two indices. The average SPX loss expands to about 40% when examining two or more years of holding periods.

Uncertainty can increase when an investor looks longer out on the investment horizon. Over the last 40 years of SPX returns, on average a -13% min return is feasible over a 12-month rolling return. Over a 2 year or 3-year period, a -40% min return average is possible. The data suggests over any of the holding periods a 3% loss is possible in managed futures with a historical potential for a -14% min return

Figure 2

Figure 3 shows the minimum returns in each holding period and when it occurred. The fourth and fifth columns note moments when similar returns occurred in the respective holding periods.

 

 

 

 

 

 

Figure 3: Occurrence of Minimum Returns 

Holding Period   SPX    
Monthly Oct 1987 -21.76%    
3 Months Oct 1987 -31.17% Nov 2008 -30.14%
6 Months Feb 2009 -42.7%    
12 Months Feb 2009 -44.76%    
24 Months Feb 2009 -47.75% Sept 2002 -43.25%
36 Months March 2003 -43.4% Feb 2009 -42.6%
    CTAs    
Monthly June 1984 9.81% July 1982 -9.12%
3 months Oct 1989 -14.16%    
6 Months Nov 1989 -12.61%    
12 Months Oct 1991 -7.88%    
24 Months March 2017 -6.78% Sept 2013 -6.69%
36 months April 2013 -9%    


Conclusion:

Examining monthly data for the last 40 years of the S&P 500 Index and the BarclayHedge CTA Index gave some insight into what has been experienced on the upside and the downside of holding periods. The data suggests returns of both indices may grow over time and the managed futures maximum return exceeds SPX in every holding period.

From a risk management standpoint, the SPX minimum return of each holding period surpasses the managed futures minimum return. There appears to be a reduction in downside volatility when the managed futures holding period reaches 12 months.

If allocation policy is an important variable for portfolio returns, then over the longer-term, combining the two investments may reduce the negative tail risk when viewing long-term investment horizons.

If you have questions or would like to receive more information on this topic, please feel free to contact the author at [email protected]

[1] Ibbotson, R. G., & Kaplan, P. D. (2000). Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? Financial Analysts Journal56(1), 26–33.

[2] Abrams, R., Bhaduri, R., & Flores, E. (2014, June). A Quantitative Analysis of Managed Futures Strategies. Retrieved from https://www.cmegroup.com/education/files/Lintner_Revisited_Quantitative_Analysis.pdf

 

Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.

 

 

About the Author: 
Mark Shore is the director of Coquest Institute at Coquest Advisors. He is also an adjunct professor at DePaul University and Illinois Institute of Technology. He is a candidate to receive his doctorate in business administration in 2020. He has a master’s degree in finance, behavioral science, and econometrics from The University of Chicago Booth School of Business. He frequently speaks at investment conferences and lectures workshops on alternative investments. He is a contributing writer to several global organizations. [email protected]

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