What Are Rolling Returns And Why Should You Care?

Image by GettyImages; Illustration by Bankrate

Whether you’re investing for retirement, your children’s college education or another milestone or goal, your objective is to make money. To that end, it’s important to look carefully at each investment you’re thinking of adding to your portfolio.

One of the things you should look at when assessing a stock, mutual fund or other asset is the rate of return it’s generated. And a common approach is to look at how a fund or stock has performed over the past year, known as annual returns.

Rolling returns, however, measure average annualized returns over a certain period of time, which can offer a more comprehensive view of a company or asset’s performance. Because of this broader view, you may want to favor rolling returns over annual returns when deciding if a given investment is right for you.

What are rolling returns?

Rolling returns measure how well (or not) an investment has performed over longer, overlapping periods of time. The purpose of rolling returns is to give investors a comprehensive idea of how well a given asset performs when adjusting for a variety of market and economic conditions.

Think about rolling returns as zooming in and out on a forest. Zoom in and annual returns may show you the trees but not the forest. Zoom out and rolling returns — which can be parsed any way you want — can show you the trees and the forest depending on how and where you look. You could look at rolling returns from when a company first went public up to today, or just the last few years.

What’s the benefit of looking at rolling returns?

It’s common to look at a given investment’s performance over the most recent calendar year. But that only accounts for a limited period of time and may not give you a solid idea of how well the investment can perform under different circumstances.

Say you decide to look at one-year returns for an investment coming off of a year when economic conditions were lousy on a broad level. It may be that those returns aren’t so impressive.

Or, say you decide to look at one-year returns coming off a year of strong economic growth. You may be looking at a large return, but that’s not necessarily indicative of what the asset in question is capable of producing over the long term.

With rolling returns, you’re looking at returns over a longer period of time, which could be two years, three years, five years or longer. That could help “correct” for specific market or economic events that may drive returns upward or downward over a shorter period of time. Rolling returns, when looked at comprehensively, also take seasonal market fluctuations out of the equation so you can get a better idea of how an investment performs as a whole.

How to calculate rolling returns

There are different ways you can calculate rolling returns. But on a basic level, you start with a preset time period and run calculations based on different start and end times within that time period.

Say you’re looking to figure out a two-year rolling return on a given asset. You’d start by taking its net asset value on one date, comparing that to the net asset value two years prior and then calculating the return between those two dates. Then, you’d shift that time frame over by one day, week, month or other time frame you want to use. You’d then repeat that process until you have comprehensive data you can look at to see how the asset in question has performed.

Bottom line

Rolling returns could help you feel more confident in the assets you choose to invest in. But do remember that when it comes to investing, past performance does not guarantee future results. 

Even if a company has rolling returns you’re happy with, that doesn’t mean you’re guaranteed to see those same returns going forward. However, what rolling returns could do is show how one given company or asset compares to similar ones so you can make an informed decision.