Buy-and-Hold Drawdown: What Strategies Are Really Compared Against
We have written before that an active strategy is compared against simply holding. But a benchmark has more than a return: holding on the same data produced a median drawdown of 8.91%, and 16.75% on the worst pair. Without that figure the comparison is incomplete.
Buy and hold drawdown: what the run showed
- Median return from holding: 4.79% over the sample, 9 of 12 pairs profitable
- Median maximum drawdown: 8.91%
- Worst drawdown: 16.75%
- Time in market: 100% — holding never exits by definition
Why return alone is not enough
The median return from holding is 4.79% with 9 of 12 pairs profitable. Compare against that number alone and any strategy with a smaller return looks like a loser. But holding pays for its result with roughly nine percent of drawdown and one hundred percent presence in the market. A strategy delivering half the return with three percent drawdown and a tenth of the time at risk is better on capital at risk — and that is visible only when comparing on two numbers.
How to compare properly
Look at the ratio of return to drawdown and at the share of time in the market. An active strategy is justified if it clearly beats holding on at least one of those dimensions, not only on absolute return. Formally that is what the Sharpe ratio expresses, but the return-to-drawdown ratio reads more plainly and depends less on the shape of the distribution.
The asymmetry of holding
A separate subtlety: holding works in one direction only. On a pair that declined all period it produces a loss, and comparing a short-selling strategy against it is incorrect. So the benchmark is more honest computed per instrument than taken as one average for everything.
What this means for our runs
In our reviews of ten rules we compared them against the median return from holding. A second figure now joins it: a rule that lost on return but won on drawdown is not a failure but a different trade-off. Why a benchmark is needed at all and the best of the runs we tested are worth rereading with that correction.
This material is for educational purposes and is not individual investment advice.
Frequently asked questions
What is the drawdown of simple buy and hold?
On our sample of 518 daily bars the median maximum drawdown of holding was 8.91%, and 16.75% on the worst pair.
Why can't you compare a strategy to a benchmark on return alone?
Because the benchmark pays for its result with drawdown and constant presence in the market. A strategy with a lower return but a third of the drawdown can be better on capital at risk.
Is comparing a short-selling strategy against holding valid?
Not entirely: holding is long-only. On a declining instrument it produces a loss, so the benchmark is more honest computed per pair.
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