Rolling Returns

Rolling returns are a way to measure an investment's performance by looking at a series of overlapping time periods. Imagine you have 10 years of stock market data. Instead of just calculating the total return from the start of year 1 to the end of year 10 (a simple Point-to-Point Return), you calculate the return for every possible 3-year chunk. You'd measure years 1-3, then 2-4, then 3-5, and so on, until you reach years 8-10. The result isn't a single number, but a whole stream of returns that shows how the investment performed across many different starting points. This method provides a far more robust and honest picture of an Asset Class's or a fund's historical performance, smoothing out the luck of a single start and end date and revealing the consistency (or lack thereof) of its returns over time.

Looking at a single Annualized Return figure is like judging a 2-hour movie by only seeing the first and last frames. You might see a happy beginning and a happy ending, but you'd miss the entire dramatic, scary, or hilarious journey in between. Rolling returns are like watching the whole movie. They show you the full range of experiences an investor might have had, including the highs, the lows, and everything in the middle. This is crucial because it cuts through marketing hype. A fund manager can easily cherry-pick a flattering timeframe—say, from the bottom of a crash to the peak of a boom—to boast about a spectacular return. Rolling returns expose this trick. They reveal an investment's Volatility and how it behaves through different market cycles, like a Bear Market or a Bull Market. For a long-term investor, knowing the typical range of outcomes is far more valuable than knowing one lucky, unrepeatable result.

You don't need to be a math whiz to understand the concept. The idea is to take a specific period (e.g., 1 year, 3 years, 5 years) and “roll” it forward through your entire data history, one interval at a time (e.g., one month or one quarter at a time).

Let's say we have the annual returns for a fund over 7 years and we want to see the 3-year rolling returns.

• Year 1: +10%
• Year 2: -5%
• Year 3: +15%
• Year 4: +20%
• Year 5: +8%
• Year 6: -10%
• Year 7: +12%

We would calculate the annualized return for each 3-year period:

• First Period (Years 1-3): The annualized return might be 6.5%.
• Second Period (Years 2-4): We roll forward one year. The return for this period might be 9.5%.
• Third Period (Years 3-5): Rolling forward again, the return could be 14.3%.
• Fourth Period (Years 4-6): The return for this chunk might be 5.1%.
• Fifth Period (Years 5-7): The final period's return could be 3.1%.

Instead of one number, you now have a sequence of returns: 6.5%, 9.5%, 14.3%, 5.1%, 3.1%. This tells you so much more. You can see the best 3-year period (14.3%), the worst (3.1%), and the average. This is the real story of the investment.

For a Value Investor, who focuses on the long-term intrinsic quality of a business rather than short-term market fads, rolling returns are an indispensable tool.

A value investor wants to know how a company or fund behaves under pressure. Does it protect capital during downturns? Does its performance hold up consistently, or is it a one-hit wonder that got lucky in a specific environment? Rolling returns help answer these questions by showing performance across many cycles. They can highlight the severity of a typical Drawdown (a peak-to-trough decline) and how long it usually takes to recover. An investment that delivers steady, if unspectacular, rolling returns through thick and thin is often more attractive than one with amazing highs and terrifying lows.

One of the biggest mistakes an investor can make is chasing past performance. A fund that returned 25% last year is unlikely to do so every year. Rolling returns ground you in reality. By showing the historical range of best-case, worst-case, and average outcomes over meaningful periods (like 5 or 10 years), they help you calibrate your expectations and build a portfolio that aligns with your personal Risk Tolerance. Understanding that even the best long-term investments have suffered difficult 3-year or 5-year stretches is a powerful lesson in patience and discipline.

Rolling returns offer a panoramic, more truthful view of an investment's history. They strip away the bias of arbitrary start and end dates, revealing the consistency and character of performance over time. For any investor, but especially a value investor, they are a powerful antidote to marketing spin and a critical tool for making informed, level-headed decisions for the long run. They help you understand not just what return an investment generated, but how it generated it.