Annual vs Trailing vs Rolling Returns

So, you already understand what stocks and mutual funds are and how they help you earn returns. But did you ever stop to realise one fact? That stated, while searching for any investment product, understanding the return it has offered in the past is quite imperative. That’s where the role of looking at ROI or return on investment serves you.

Considering the above topic of discussion, the annual, trailing, and rolling returns are key metrics. So, they help evaluate investment performance around different time periods. Want to discover annual vs trailing vs rolling returns differences? On that note, let’s find out the differences between these three returns and the given points.

What is Annual Returns?

Before you understand the differences between annual vs trailing vs rolling returns, here’s everything to learn about annual returns.

So, annual returns refer to the gain or loss on an investment portfolio in a fiscal year. This return measures the investments and their performance in the previous year. Note that annual returns are usually denoted in the percentage form.

Notably, individual investors need to consider annual returns. After all, it helps them make a well-informed decision about how their investment portfolio grows during one financial year. At the same time, it also helps assess when the returns achieved have aligned with the returns as well as their financial goals.

Considering stocks, annual returns can reflect the overall capital losses and gains by shareholders. So, the details let investors gauge the volatility and profitability of specific stocks. Note that you can also compare them with the market benchmarks like stock indices (Nifty 50 or BSE Sensex).

Besides, learning about annual returns helps an investor optimise tax liabilities. So, it helps you make strategic decisions based on investment holding periods.

Checking the consistency in the investment product’s performance year after year is beneficial. Calculating the annual return is pretty straightforward. All you need is to find your investment price at the end of the calendar year and the previous year. 

After this, you need to subtract the previous year’s price from this year’s price. Finally, you can divide the change in price by the previous year’s price. The only limitation here is that multiple years of annual returns cannot assess compounding’s impact.

What is Trailing Returns?

Next is the trailing returns, which happens to be another vital metric that investors use for evaluating the performance of various investment instruments over the trailing period. Simply put, trailing returns are the percentage change in an investment’s value over a certain period leading to the current moment. 

Note that trailing returns can help you measure the annual return on average between two specific dates. So, the compounding formula is used for calculating the return. However, it is crucial to remember that trailing returns are an indication of historical performance. So, they don’t account for shifts in the market. Additionally, they promise no specific future results. So, while assessing the potential of the investment, an investor must consider various parameters like risk and fees besides trailing returns.

Besides, one should remember that trailing returns only measure performance for one block of time. So, they show the point-to-point return. Therefore, a fund’s trailing return does not necessarily show its volatility or consistency.

What is Rolling Returns?

Evidently, rolling returns are another fundamental consideration that investors use for analysing the investment’s historical performance over different holding periods. Unlike the other two mentioned above, rolling returns come with excellent investment performance. Factually, it calculates the average annualised return for all holding periods of one specified length.

Simply put, rolling returns are beneficial as investors can easily understand the type of returns simply by looking at them. So you can understand your earnings and probabilities of returns easily.
 

What are the Differences Between Annual Vs Trailing Vs Rolling Returns?

All the three types of returns stand out differently. So they are useful for various purposes. Let’s find out the key difference between annual vs trailing vs rolling returns from the table mentioned below:

From the table mentioned above, it is important to state that annual returns measure the investment loss or gain over a one-year period. Additionally, it shows the portfolio’s performance over the preceding year.

On the contrary, trailing returns can measure performance from the investment’s start date till the current date.

Thus, the five-year trailing return can calculate cumulative gains for the past five years until the present date.

Nonetheless, rolling returns can analyse returns over one fixed period and shift forward. So, let’s take an example. Support the one-year rolling return first and calculate the annual return from Jan 2023 to Jan 2024. So, the next rolling return will be from Feb 2023 to Feb 2024, and the same thing goes on.

Differences

So, the difference between annual vs trailing vs rolling returns: 
• Annual returns are fixed for one financial year, but trailing and rolling returns depend on end-period
• Trailing returns for a long duration and impacted more by market swings
• Additionally, trailing returns give a long-term perspective, while rolling returns analyse performance based on increments

Investors use a combination of these return measures to get both the big picture and intermediate performance progress of their portfolios. Each return measure serves a different analytical purpose for investment evaluation.