Rolling Returns
Understanding why rolling returns are a more accurate measure of investment performance
As an investor, it's important to understand how your investments are performing over time. One common way to measure performance is by looking at a fund's or portfolios total return. However, while total return can be useful, it may not provide a complete picture of how your investments are performing over time. That's where rolling returns come in.
Rolling returns, also known as trailing returns, are a way to measure an investment's performance over a specific time frame. Rather than looking at the total return over a specific period, rolling returns look at the return over multiple, non-overlapping periods of the same length.
For example, let's say you're invested in a mutual fund and you want to evaluate its performance over the past five years. Instead of looking at the fund's total return over the five-year period, you could look at its rolling returns over five-year periods. This would give you a series of returns for each five-year period, which you could then use to evaluate the fund's consistency and volatility over time.
There are several reasons why rolling returns are a more accurate measure of investment performance:
- Smoothens out short-term volatility
Total returns can be heavily influenced by short-term market fluctuations. By using rolling returns, you're able to smooth out those fluctuations and get a more accurate picture of how your investments are performing over a longer period of time.
- Considers the impact of market cycles
Market cycles can have a significant impact on investment returns. By using rolling returns, you can see how your investments have performed over multiple market cycles, which can give you a better understanding of how your investments are likely to perform in the future.
- Evaluates consistency
Total returns can be heavily influenced by a few good or bad years. Rolling returns give you a more accurate picture of how your investments are performing over time, which can help you evaluate their consistency.
- Useful for comparing investments
When comparing different investments, it's important to look at their performance over the same time frame. Rolling returns make it easy to compare investments over multiple time frames, which can help you make more informed investment decisions.
As an investor, understanding the importance of rolling returns can help you make more informed investment decisions and better track your investments' performance over time.