Understanding Returns: Why Strategy And Holding Period Matter More Than Stocks

These questions are common, but they miss the main point. Windmill Capital’s model and quant smallcases are not about picking individual stocks; they are strategy-based portfolios. The long-term results depend on the underlying strategy, not just on the stocks in the portfolio.

Most investors think about single stocks: “Should I sell this one?” “Why did that one drop?” “What will move this one?” But quant portfolios are built on strong factor exposures like value, momentum, quality, size, and low volatility. These factors have been proven through decades of academic and real-world market data in India and around the world. These strategies tend to outperform over the long term, but their returns are not steady. They may lag at times, and their success relies on diversification and consistency rather than on isolated bets. The portfolio’s strength comes from the rules, not from predicting what any single stock will do next month.

This is why there is no quick fix to boost returns. A multi-factor approach works because it avoids opinions, emotions, and market timing. The strategy should be followed as intended. This means sticking to it systematically, without changes, and rebalancing regularly. Trying to adjust signals, second-guessing factor cycles, or depending on short-term forecasts typically hurts long-term returns.

When investors ask for 12 to 24-month outlooks or when they will see positive returns, it’s crucial to remember that no evidence-based strategy can predict short-term performance. Markets don’t change in predictable ways. From our experience and the data in India, we know that factor strategies need three to five years to show their advantages, and the chances of positive returns increase significantly with longer holding periods. The focus is not on what the portfolio will earn next year. Instead, it’s on following a disciplined, research-driven process that aims for long-term results. Markets can be unpredictable, but a steady, rules-based approach helps manage cycles more effectively.

A strong strategy alone won’t guarantee success. The holding period is the real factor that determines outcomes. The probability-of-loss table shows this clearly: for the Nifty 500, the chance of negative returns decreases from 23% over one year to 0% over seven years. Even higher-volatility segments like small caps drop from about 40% to nearly zero over time. Factor strategies tend to have cycles. Value can struggle for a longer time, with a 39% chance of a one-year loss. Momentum stabilises faster, showing only a 3.5% chance of loss over three years. Low volatility consistently protects capital, with no losses beyond five years. Exiting early only captures short-term noise, whereas staying invested through full market cycles allows for mean reversion, trend persistence, and systematic compounding to reveal the strategy’s true advantages.

Probability of negative returns vs holding period

These probability-of-loss numbers are index-level and historical, not forecasts. They’re indicative patterns, not guarantees, and they don’t predict returns for any specific strategy or portfolio.

Rebalancing helps keep the portfolio true to its design. Each rebalance adds stocks that meet certain criteria and removes those that no longer qualify. Skipping rebalances disrupts the model, raises risk, and leads to performance drift.

You can think of it this way: Strategy is the seed. The holding period is how long the seed needs to grow.

No amount of waiting can fix a bad strategy, but a good strategy can fail if you dig it up every few weeks. Ultimately, strategy defines your long-term return potential. Discipline and holding period determine how much of that potential you actually achieve. Staying invested, avoiding emotional decisions, and rebalancing on time turn a strong model into real-world returns. Investors who adopt this mindset give themselves the best chance to benefit from Windmill Capital’s factors model and quant smallcases. 

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The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary. Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.