For client portfolios (where the number of shares is specified for each position) there are two ways to simulate a buy and hold strategy. The portfolio at the beginning of the simulation may be constructed using either weights or shares, and this strategy choice affects the performance results.
Buy weights and hold
The portfolio at the beginning of the simulation is assigned the current weights.
Buy shares and hold
The portfolio at the beginning of the simulation is assigned the number of shares, and weights are calculated from these shares. This may result in different weights than the current weights.
A portfolio is composed of 469 shares of SPY (US equity) and 1582 shares of BND (US bonds), corresponding to 50% SPY, 50% BND at the current date. We wish to simulate a 3 years buy and hold strategy.
If we select the Buy weights and hold strategy, the portfolio at the beginning of the simulation is 50% SPY and 50% BND, as shown in the Value chart below.
If we select Buy shares and hold, the portfolio at the beginning of the simulation is 1582 shares of BND and 469 shares of SPY, which (based on the prices for these assets on that day), corresponds to 57% BND and 43% SPY. This results in a lower return, because the portfolio is tilted towards BND.
Which one should you use ?
- Weights based: is recommended when comparing buy and hold to a rebalanced strategy
- Shares based: is recommended when trying to estimate portfolio performance over a short period of time