rolling_return

A Rolling Return is a far more insightful way to measure an investment's performance than the typical metrics you see splashed across financial news. Think of it as a moving average of returns. Instead of just looking at the performance from a single start date to a single end date (like the return for the calendar year 2023), a rolling return calculates the average return for a specific period (say, 5 years) on a staggered basis. For example, a 5-year rolling return would first show the average annual return from January 2015 to December 2019, then from February 2015 to January 2020, then March 2015 to February 2020, and so on. Plotting these results on a chart reveals a continuous stream of performance data, smoothing out the lucky or unlucky timing of a single starting point and giving you a much truer picture of an investment's consistency and behavior through various market cycles. It's like watching a full movie of the investment's life instead of just looking at a single, potentially misleading, snapshot.

Standard return figures can lie by omission. They often hide more than they reveal because they are hyper-sensitive to their start and end dates. Rolling returns fix this problem by showing you the whole performance landscape.

A point-to-point return, like a compound annual growth rate (CAGR) calculated from one date to another, suffers from what's known as endpoint sensitivity. Imagine you invested in a fund in March 2009, right at the bottom of the financial crisis. Your 10-year return to March 2019 would look heroic! Now, imagine your friend invested in the exact same fund but started in October 2007, right before the crash. Their 10-year return would be far less impressive. The fund didn't change, but the story told by the point-to-point return did, simply due to timing luck. A rolling return analysis would show both of these outcomes—the spectacular recovery and the painful drawdown—giving you a complete and honest assessment of the risk and reward involved.

Looking at returns on a calendar-year basis (Jan 1st - Dec 31st) is common, but arbitrary. Why is that 12-month window more special than any other? An investment that did poorly from January to December might have performed brilliantly from June to the following May. A rolling 12-month return captures all of these periods, providing a richer, more robust view of an investment's short-term behavior and volatility.

While you probably won't calculate these by hand, you'll often see them presented in charts in fund literature or on financial websites. Understanding what you're looking at is a superpower for any investor.

Let's say a fund manager shows you a chart of their 10-year rolling returns, updated monthly, over the last 30 years.

1. The first data point on the chart represents the average annualized return for the first 10-year period (e.g., Jan 1994 - Dec 2003).
2. The second data point is for Feb 1994 - Jan 2004.
3. …and so on, until the most recent 10-year period is calculated.

The result is a single, flowing line that represents hundreds of different 10-year investment outcomes.

When you see one of these charts, you're not just looking at a number; you're diagnosing the character of an investment. Pay attention to these key features:

• The Average: What is the average value of the line? This tells you the typical return an investor would have experienced over that specific time frame (e.g., a typical 10-year period).
• The Peaks and Troughs: The highest point on the chart shows you the best-case scenario for any given holding period of that length. The lowest point shows you the worst-case scenario. For a value investor, understanding the worst historical outcome is crucial.
• Volatility: How bumpy is the line? A smooth, gently sloping line suggests consistent, predictable performance. A line that looks like a wild rollercoaster suggests a boom-and-bust investment that requires a strong stomach.
• Time Below Zero: How often, if ever, does the line dip below zero? If a 10-year rolling return chart for a fund never drops below zero, it means that throughout its history, any investor who held on for at least 10 years made money. That's a powerful statement.

For value investors, rolling returns are not just a tool; they are a philosophical match. The principles of Benjamin Graham and Warren Buffett emphasize a long time horizon, business-like analysis, and a deep understanding of risk. Rolling returns, especially over longer periods like 10 or 20 years, perfectly align with this. They force you to think like a long-term owner, not a short-term speculator. By showing the full range of historical outcomes, they provide a realistic basis for calculating a margin of safety in performance, not just in price. They also serve as a powerful antidote to recency bias, preventing you from being fooled by a fund's hot streak in the last couple of years by showing you its performance in the cold, hard winters of the past.