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Expected Average Holding Period

CalendarIn the field of investing, people often talk about “investment time frames” or “investment time horizons.” The idea is that the longer the time frame considered, the more likely the “expected outcome” is to occur. For example, over longer periods of time:

  • Stocks become more likely to earn a positive return, and
  • High-risk investments become more likely to outperform low-risk investments.

A more precise way to speak of “investment time frame” might be to refer to it as your portfolio’s “expected average holding period.” (Average holding period being the average of the holding periods for each dollar you have invested.)

Who cares?

It may seem like I’m splitting hairs here. The reason for the distinction is that using the term “expected average holding period” could help us to keep in mind precisely which time frame we’re talking about, thereby helping to prevent such mistakes as assuming that your time frame is from now until the day you retire.

Estimating Your Average Holding Period

There’s no way to calculate precisely what your average holding period will be, given the fact that we don’t know precisely how much you’ll be spending each year or what rate of return your investments will earn. That said, I think that using your remaining life expectancy provides a reasonably accurate estimate (for most people) for the following reasons:

If you’re like many people, and you intend to pass along a portion of your assets to some other party upon your death, then the expected holding period for those assets is in fact longer than your current life expectancy.

Even if you intend to spend every last dollar before you pass on, your average holding period should still be significantly past the halfway point of your retirement, as the rate at which you spend down your portfolio will increase throughout retirement. (Reason being that in early retirement years, you’ll be able to live mostly off the earnings.)

Putting it to Use

When you have a better idea of what, precisely, the relevant time frame is for your investments, you can do a better job of determining an appropriate asset allocation.

For example, my own expected average holding period is approximately 50 years. (And that doesn’t take into account the fact that the joint life expectancy of myself and my wife would be even longer.) There’s no guarantee, but over 50 years, it’s pretty likely that the expected risk/return relationships will prove true, hence my high stock allocation.

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  1. I think it makes sense to plan even beyond your life expectancy, which is based on averages. While odds are lower that you’ll live longer, it’s still possible, and the consequences become greater the longer you live past what you plan.

    Also, the longer your time frame, the wider the range of the potential outcomes will become. Many people mistakenly believe that risks associated with investing decrease over time. One of the greatest risks, that things won’t go as planned, actually increases as the time frame increases.

  2. This is a crucial issue.

    Unfortunately, what makes sense is often what people fail to do.

    The average return of investments far exceeds the average return of investors precisely because expected hold is far greater than actual hold period.

    Folks are overtaken by their emotions. This is an important article because it reinforces and reiterates the concept of hold period. Thanks….

  3. Rob: I’m not referring to any particular length of time at all.

    I’m simply saying that as the length of time increases, so too does the likelihood that “expected” outcomes will occur.

  4. over longer periods of timesStocks become more likely to earn a positive return

    Claims along these lines have caused a great deal of confusion in recent decades.

    If the “longer period of time” is defined as “30 years,” this claim is accurate. Stocks have always provided a good return in 30 years.

    If the “longer period of time” is defined as “five year” or “10 years” or “15 years” or “20 years,” this claim was inaccurate for the entire time-period from 1996 through 2008. For that entire time-period, stocks were selling at such insane prices that the longer you held them (short of 30 years), the more certain you were to do worse in stocks than you were in just about any other asset class.

    It’s not that stocks are always best for the long run. It’s that stock returns become more and more predictable the farther you go out. Even at times of insane prices, stocks can do well for a year or two or three. But there’s virtually no hope of stocks doing well in the long term when you buy them at the prices that applied from 1996 through 2008.

    Unless you define “long term” as “30 years.” Then the Passive Investing claims really do hold up to scrutiny. We’ve never yet reached prices so high that stocks didn’t end up doing well at the end of 30 years.


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