What Is a Trailing Return and How Do You Calculate It?

Assessing investment performance is a fundamental practice for anyone seeking to understand the progress of their financial assets. Various metrics exist to evaluate how an investment has performed over time. Among these, the “trailing return” stands out as a commonly used measure for evaluating historical performance.

Defining Trailing Return

A trailing return quantifies an investment’s historical performance over a specific period, measured backward from the current date. It is expressed as a percentage and commonly reported over standardized periods such as one-year, three-year, five-year, or ten-year intervals.

A trailing return reflects the actual rate of return an investment has generated over a specified duration, encompassing capital appreciation or depreciation and any reinvested income like dividends and capital gains distributions. Trailing returns are also known as “point-to-point returns” because they measure performance between a specific past date and the present.

Calculating Trailing Return

Calculating a trailing return involves determining the percentage change in an investment’s value over a defined historical period, including the initial and ending values, and the reinvestment of all income received. For a simple, single-period calculation, subtract the beginning value from the ending value, divide by the beginning value, and then multiply by 100 to express it as a percentage.

For example, if an investment was valued at $100 five years ago and is now worth $130, its trailing return over that five-year period would be 30%. For periods longer than one year, such as three or five years, the return is annualized. This converts the total return into an average annual growth rate, reflecting the effect of compounding.

Interpreting Trailing Return

A positive trailing return indicates an investment has increased in value over the specified period, including reinvested income. Conversely, a negative trailing return shows a decrease in value. Investors commonly use this metric to assess recent performance.

One of the primary uses of trailing returns is for comparative analysis. Investors can compare an investment’s trailing return against a relevant market benchmark, such as the S&P 500 index, to determine if it has outperformed or underperformed the broader market. Comparing trailing returns of different investments over the exact same timeframes can also help identify which options have historically delivered stronger results. It is important to look at trailing returns over multiple periods, such as one, five, and ten years, to gain a more comprehensive understanding of an investment’s performance consistency across various market conditions. However, past performance does not guarantee future results, a fundamental principle in investing.

Comparing Trailing Return with Other Metrics

While trailing returns provide valuable insights, distinguishing them from other related metrics is important. For periods longer than one year, trailing returns are annualized, showing the average annual growth rate over the specified period, taking compounding into account. This differs from a simple arithmetic average of annual returns, which does not account for compounding.

A cumulative return represents the total percentage gain or loss of an investment over its entire holding period, without being annualized. A trailing return can be expressed as a cumulative figure for a specific period, or it can be annualized to show the average yearly growth within that period. Another related metric is rolling returns, which differ significantly from trailing returns. While trailing returns measure performance from a fixed past date to the current date, rolling returns calculate performance over overlapping intervals. For example, a three-year rolling return would calculate the return for every possible consecutive three-year period within a longer timeframe, providing a more consistent view of performance across different market cycles and reducing the bias of a single start or end date.