Trailing vs Rolling Returns

In a world of instant updates and daily stock market news, investors often fixate on chasing short-term returns or “beating the market.” This leads to dependency on trailing returns to determine “how well” an investment is performing.

But for investors with long-term goals, their focus should be, “Will I achieve my long-term goal on time?” Because of this, advisors should use rolling returns rather than trailing returns when choosing or evaluating investments and managers.

What will be covered?

  • The Problem with Trailing Returns
    • Misguided Expectations
    • What a Difference a Year Makes
    • Two Years Later: 2020 vs 2022
    • Timing Woes
  • Rolling Returns
    • Performance Consistency
    • Reflects the Investor Experience
    • Better Expectations
    • Rolling Returns for the Long-Term

The Problem with Trailing Returns

The most common way of looking at returns in the investment industry is by using trailing returns. Trailing returns, or point-to-point returns, are a snapshot of the past, going back over a chosen period of time from a chosen anchor date, such as the latest quarter, 1-year, 3-year, or 5-year returns.

The problem with this approach is that It only measures a specified block of time. This can lead investors to expect future performance will mimic recent results, a phenomenon known as recency bias. With this late-stage bull market, what could investors expect going forward?