Rolling Returns vs. Point-to-Point Returns: What Smart Investors Look At

When you start investing, you might hear about different types of returns. Two common ones are rolling returns and point-to-point returns. Each type can give you important information, but they do it in very different ways. Understanding the differences between them can help you make better investing decisions. This article breaks these concepts down so you can see what smart investors look for.

What Are Point-to-Point Returns?

Point-to-point returns are the simplest type of return measurement. This is how it works:

1.  Start Point: You look at the value of an investment on a specific date, for instance, January 1, 2020.

2.  End Point: You then look at the investment value on another specific date, like December 31, 2020.

3.  Calculation: The return is calculated by taking the end value, subtracting the start value, and dividing that by the start value. Finally, you multiply by 100 to get a percentage.

This method gives you a straightforward picture of how much your investment has grown over a certain period.

Example of Point-to-Point Returns

Suppose you bought stocks for $100 on January 1, 2020, and they are worth $120 on December 31, 2020. Your point-to-point return is calculated as follows:

●       Start Value: $100

●       End Value: $120

●       Calculation:

○       (120 - 100) / 100 * 100 = 20%

Your point-to-point return is 20%.

What Are Rolling Returns?

Rolling returns offer a more detailed view of investment performance by examining returns over a moving period. Instead of just comparing two dates, rolling returns look at returns over multiple overlapping time frames. This gives you insight into how an investment performs during varying market conditions.

How Rolling Returns Work

1.  Choose a Period: Decide on a time period, such as 3 years.

2.  Calculating Returns: For each rolling period, look at the returns from the beginning to the end of that period. For example, if you pick February 2018 to February 2021, you calculate the return for that 3-year span.

3.  Move Forward: Then slide the window forward one month and calculate the return again. Continue this until you reach the end of your investment data.

Example of Rolling Returns

If you are evaluating a mutual fund's performance over five years, you could calculate the return for every three-year segment within that five-year period. This gives you a more complete view of how the fund performs over time.

For instance:

●       From January 2018 to January 2021: 15%

●       From February 2018 to February 2021: 14%

●       From March 2018 to March 2021: 12%

You can see how the return varies over time. This can be very useful in understanding risk and consistency.

Why Choose Rolling Returns?

Rolling returns can be especially useful for smart investors for several reasons:

●       Identifies trends: Investors can spot trends over time, which can indicate how well an investment may perform in the future.

●       Assessing volatility: With rolling returns, you can see how much an investment fluctuates over time. This helps you understand the risk involved better.

●       Long-term performance: As you look at returns over several years or even decades, you see how an investment holds up over the long haul.

When to Use Point-to-Point Returns?

Point-to-point returns are still very valuable, especially when:

●       Easy communication: If you're explaining your investment performance to someone who is not familiar with finance, point-to-point returns are easier to understand.

●       Short Time Frame: If you want to analyze a short investment period, point-to-point returns give a quick snapshot.

How Smart Investors Use Both Returns

Smart investors generally do not rely on just one type of return. They look at both rolling returns and point-to-point returns to get a fuller understanding of their investments. Here’s how:

1.  Starting with Point-to-Point: Investors often look at point-to-point returns first to get a quick overview.

2.  Digging Deeper with Rolling Returns: After that, they analyze rolling returns for deeper insights, particularly if they are evaluating a long-term investment.

3.  Making Informed Decisions: With insights from both methods, investors feel more prepared to make strategic decisions about their portfolios.

Conclusion

Understanding rolling returns versus point-to-point returns is key for anyone interested in investing. While point-to-point returns provide a simple measure of performance over fixed periods, rolling returns offer a deeper look into how an investment performs over time. By combining insights from both, investors can better assess risks, gauge trends, and optimize their strategies.

FAQs

Q1: Which return method is better for short-term investments? 

A1: Point-to-point returns are often better for short-term investments since they provide a quick snapshot of performance over specific periods.

Q2: Do rolling returns help with risk assessment? 

A2: Yes, rolling returns are useful for understanding how much an investment fluctuates over different periods, which helps assess risk.

Q3: Can I use these returns for any type of investment? 

A3: Yes, both rolling and point-to-point returns can be applied to various types of investments, including stocks, mutual funds, and bonds.

In essence, making smart choices with investments relies on the right tools and methods. Understanding the differences between point-to-point and rolling returns is a good start.