The length of the holding period for stocks (or any asset) is commonly used to distinguish between trading and investing. It represents the number of days between the purchase of the stock and the sale of the stock. At one end of the spectrum are day traders who may take a position in a stock for a few minutes or even a few seconds. At the other end are buy and hold investors who may intend to hold a position for years.
The common denominator for traders and investors is that a position is closed when it no longer meets their holding criteria. This can, for example, mean that a time period such as the end of the day or the end of a quarter has been reached. Or it can mean that a company no longer represents value or that the technical analysis of the stock price is no longer satisfactory. It may mean reaching a profit target.
Holding duration is also a convenient way to evaluate the performance of investing strategies and portfolios. The typical period for comparison is one year so returns are annualized.
Comparing performance of a strategy against its benchmark allows you to determine if you are out-performing or under-performing over time. When strategy performance is adjusted for risk, it is referred to as alpha.
Out-performing is positive alpha; under-performing is negative alpha. If you under-perform consistently, you would be better off buying the benchmark.
The holding time is not just for characterization as a trader or an investor – it can have tax consequences as well. For US taxpayers, the IRS considers an asset held for a year and a day as a long term gain (or loss) and something less as a short term gain or loss. The length of the holding period in this case affects how gains are taxed and how losses are applied.
An interesting by-product of the tax consequences is that investors may choose to ignore exit strategies to gain a favorable tax consequence.
NOTE: If you are inclined to buy and sell to affect your tax bill, you should probably discuss your plan with an accountant since there are regulations to consider.
You must take the approach that best suits you. Apart from possible tax implications, the length of time the position is held is not the issue. “Buy and forget” and “buy and not know what to do next” are the issues.
Investing demands not only what and when to buy, but what and when to sell.
For stock screening, define exit criteria for positions in each strategy and decide how often you will evaluate the positions. When a position is no longer worthwhile, close it.
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Updated Apr 2016