Trailing returns take the performance of an investment or portfolio over a given time and measure it against the performance of the investment or portfolio over a trailing period. This makes them different from other metrics, such as cumulative returns or annualized returns, which look at an investment's performance over a specific period. There are a few key reasons why trailing returns are so crucial for investors. First, they can help you spot trends in your investments. If the trailing returns of a particular investment have declined, it might be time to sell that investment. Second, trailing returns can give you an idea of how volatile an investment has been historically. Volatility is crucial to consider when making investment decisions, as it can indicate the amount of risk you take on with a particular investment. Finally, trailing returns can compare investments or portfolios. This can help you determine which one might better fit your needs. There are two ways to calculate a trailing return: To calculate an absolute trailing return, you need the following information: To calculate a relative trailing return, you need the following information:What Are Trailing Returns?
Why Do Investors Use Trailing Return?
How to Calculate Trailing Returns on an Investment Portfolio
Absolute Trailing Returns:
Relative Trailing Returns:
How to Interpret Trailing Returns
Now that you know how to calculate trailing returns, it is crucial to understand what they mean. In general, a higher trailing return is better. However, it is also important to consider the context of each investment.
For example, an investment with high volatility might have a high trailing return but be a poor choice for someone looking for stability.
Additionally, trailing returns should be compared to the returns of other investments to get a sense of how they measure up.
One way to interpret trailing returns is by comparing them to the benchmark used in the calculation.
Trailing returns on an absolute basis can give you an idea of how much an investment has grown on a nominal basis, which can be compared to the benchmark.
Trailing returns relative to a benchmark can tell you if an investment has outperformed or underperformed the benchmark over the measured time horizon.
Some individuals are tempted to compare trailing returns across investments at different points.
This is generally not recommended because the results of this type of comparison will be skewed by various factors, such as the overall stock market.
For example, if the stock market is doing well and your investment portfolio is not, the trailing return will be lower than it would have been had you invested in a different period.
Also, past performance does not guarantee future performance and should not be used to determine an investment's potential.
What Should I Consider Before Investing in Stocks With High Trailing Returns?
When looking at stocks with high trailing returns, it is crucial to consider a few things:
- The company's financial stability. Make sure the company you are investing in is stable and has a good track record.
- The stock's volatility. A high trailing return might be due to high volatility, which can mean the investment is risky.
- The company's growth potential. Make sure the company you are investing in is growing and has a good future outlook.
- The price of the stock. A high trailing return might be due to a high stock price, which could mean it is not good value for your money.
Trailing Returns vs Rolling Returns
There is another type of trailing return calculation: rolling returns.
Rolling returns are similar to trailing returns, but they measure the performance of an investment over a different time horizon.
For example, you might use rolling returns to measure the performance of an investment over the past week, month, or year.
This type of calculation can be helpful when you want to get a more detailed picture of how an investment has performed. It can also help when you want to compare the performance of different investments.
However, it is crucial to note that rolling returns are not as widely used as trailing returns and might not be available for all types of investments.
Using Trailing Returns to Evaluate Mutual Funds
When evaluating mutual funds, trailing returns can help understand how the fund has performed.
The calculation of trailing returns uses a rolling period, which means that the most recent performance is always utilized when calculating the return.
This allows you to see how the fund has performed recently and how it has fared over time.
Trailing returns can also compare mutual funds. This can help you decide which fund is right for you by allowing you to see how it stacks up against others.
It is crucial to remember, however, that past performance does not guarantee future results.
The Bottom Line
Trailing returns are a useful tool for investors to measure the performance of an investment. They can compare investments and evaluate mutual funds.
However, it is crucial to remember that past performance does not guarantee future results.
When looking at stocks with high trailing returns, consider all aspects of the investment before making a decision. Remember that past performance does not always consider future success.
FAQs
1. What is a trailing return?
A trailing return is the percentage return on an investment over a specific period, calculated by subtracting the current price from the beginning price and dividing it by the beginning price multiplied by 100.
2. Why do investors use trailing returns?
Investors use trailing returns to measure an investment's performance relative to a benchmark over a specific period and to understand an investment's volatility.
3. How do I calculate the trailing return on an investment portfolio?
To calculate the trailing return on an investment portfolio, add up the individual returns for each security in the portfolio and divide by the number of securities in the portfolio. Multiply by 100 to convert to a percentage.
4. How do I interpret the results of a trailing return calculation?
The results of a trailing return calculation can compare an investment's performance to a benchmark, understand an investment's volatility, and determine if an investment is a good fit for your portfolio. However, it is crucial to remember that past performance does not always indicate future results.
5. What should I consider before investing in stocks with high trailing returns?
Before investing in stocks with high trailing returns, it is crucial to understand the risks associated with these types of investments. High trailing returns are usually associated with higher-risk investments because the stock's performance has been volatile, which means that future strong performances are less likely to be repeated. Remember that past performance does not always indicate future results and that high-performing stocks are in certain industries, such as technology, biotechnology, and pharmaceuticals.
