How to Calculate Rolling Returns

How to Calculate Rolling Returns – SmartAsset

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When comparing investments in your portfolio, you may be concerned primarily with the returns a particular security generates over time. Rolling returns measure average annualized returns over a specific time period and they can be helpful for gauging an investment’s historical performance. Knowing how to calculate rolling returns and interpret those calculations is important when using them to choose investments. A financial advisor can familiarize you with several other metrics to gauge your investments’ progress.

What Are Rolling Returns?

Rolling returns represent the average annualized return of an investment for a given time frame. Specifically, rolling return calculations measure how a stock, mutual fund or other security performs each day, week or month from the time frame’s beginning to ending dates.

Essentially, rolling returns breaks a security’s performance track record into blocks. Investors can determine what return data to focus on for a particular block of time. For example, you may use rolling returns to measure a stock’s monthly performance over a five-year period or its daily returns for a three-year period.

Rolling returns calculations can measure an investment’s return from dividends and price appreciation. Typically, it’s more common to use longer periods of time such as three, five or even 10 years, to measure rolling returns versus to get a sense of how an investment performs. That’s different from annual return, which simply measures the return a security generates within a given 12-month period. It’s also different from yield.

How to Calculate Rolling Returns

If you’re interested in using rolling returns to evaluate different investments, there’s a step-by-step process you can follow to calculate them. The first step is choosing a start date and end date for which to measure returns. For example, say you want to measure rolling returns for a particular stock over a 10-year period. If you’re specifically interested in how well the stock performs in recessionary environments, you might set the tracking to extend from Jan. 1, 2006, to Jan. 1, 2016, which would include performance history for the Great Recession.

The next step is determining the return percentage generated for each year of the period you’re tracking. To do this, you’ll need to know the starting price and ending price for the stock or other security for the applicable years. Take the ending price and subtract the beginning price, then divide that amount by the beginning price to find that year’s return.

Next, you’ll use averaging to calculate rolling returns. Add up the return percentages you calculated for each year of the time period you’re tracking. Then divide the total by the number of years to get the average annualized return.

To find rolling returns, you’d simply adjust the time frame being measured. So, if you started with Jan. 1, 2006, for example, you could adjust your time frame to track the period from Feb. 1, 2006 to Feb. 1, 2016. Or you could look at rolling returns on a yearly basis, which means removing returns for 2006 and recalculating using returns for 2017.

This makes it fairly easy to customize rolling returns calculations when evaluating investments. You could use rolling returns calculations to mimic your typical holding period for a stock or mutual fund. For example, if you normally hold individual investments for five years then you might be interested in isolating rolling returns for that same time frame.

Rolling Returns vs. Trailing Returns

When comparing investments, you may also see trailing returns mentioned but they aren’t the same as rolling returns. Trailing returns represent returns generated over a given time period, e.g. one year, five years, 10 years, etc. For that reason, they’re often called point-to-point returns.

Trailing returns can be helpful if you’re interested in getting a snapshot look at an investment’s performance history. That’s useful if you want to know exactly how an investment performed at any given time. Trailing returns can be problematic, however, since it’s difficult to use them to gauge how an investment might perform in the future.

What Rolling Returns Tell Investors

Rolling returns can be useful for comparing investments because they can offer a comprehensive view of performance and returns. Specifically, examining rolling returns rather than focusing solely on annual returns allows you to pinpoint the periods when an investment had its best and worst performance. For example, you could use a five-year rolling return to determine the best five years or the worst five years a particular stock or fund offered to investors. This can help with deciding whether an investment is right for your portfolio, based on your goals, risk tolerance and time horizon for investing.

If you lean toward long-term buy-and-hold strategies versus shorter-term day-trading, for instance, then rolling returns can give you a better idea of how well an investment may pay off while you own it. Looking only at average annual returns may skew your perception of an investment’s performance history and what it’s likely to do in the future.

You may use rolling returns as part of an index investing strategy. Index investing focuses on matching the performance of a stock market benchmark, such as the S&P 500 or the Nasdaq Composite. It’s possible to calculate rolling returns for a stock index in its entirety, which can make it easier to see where the high and low points are for performance.

If you prefer actively managed funds in lieu of index funds, calculating rolling returns can also be helpful. In addition to assessing the fund’s performance over a specified time frame, rolling returns can also offer insight into the fund manager’s skill and expertise. If, for example, an actively managed fund outperforms expectations during an extended period of market volatility that can be a mark in favor of the fund manager’s strategy.

The Bottom Line

Rolling returns can make it easier to set your expectations for a particular investment, based on its best and worst historical performance. Calculating rolling returns isn’t difficult to do, and it’s something to consider if you’re focused on the long-term with your investment strategy.

Tips for Investing

  • An investment calculator can give you a quick estimate of how your investments will be doing in the years to come. Just put in the starting balance, yearly contribution, estimated rate of growth and time horizon.
  • Consider talking to your financial advisor about rolling returns and how to calculate them. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors locally. If you’re ready, get started now.

Photo credit: ©iStock.com/guvendemir, ©iStock.com/MarsYu, ©iStock.com/Chainarong Prasertthai

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.

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