What Are Historical Returns?
You know, historical returns are basically the past performance of a security or an index, like the S&P 500. As an analyst, I review this data to predict future returns or figure out how a security might respond to something like a drop in consumer spending. You can also use historical returns to estimate where future data points might land in terms of standard deviations.
Key Takeaways
- Historical returns are tied to the past performance of securities or indices, such as the S&P 500.
- You study this data to forecast future returns or estimate reactions in specific situations.
- To calculate it, subtract the most recent price from the oldest, then divide by the oldest price.
Understanding Historical Returns
When I analyze historical data, it gives me insight into how a security or market has handled different variables, from normal economic cycles to unexpected global events. If you're an investor interpreting these returns, remember that past results don't guarantee future ones. The older the data, the less reliable it is for forecasting.
For a stock index like the S&P 500, I typically measure the historical return from the January 1st open to the December 31st close for the annual figure. I compile each year's return to show the pattern over time. You can also calculate the average historical return—say, a stock averaged 10% per year over five years. But keep in mind, that average doesn't mean there were no down years; gains in other years just offset the losses to make the average positive.
You can figure out historical returns for any investment, like a home's value, real estate, mutual funds, or ETFs, which are baskets of securities. I also use them to measure commodity price performance, such as gold, corn, wheat, or silver.
How to Calculate Historical Returns
Calculating the historical return of an asset or investment is straightforward, and I'll walk you through it.
You subtract the most recent price from the oldest price in your data set, then divide that result by the oldest price. Move the decimal two places right to turn it into a percentage.
For instance, to calculate the S&P 500 return for 2019, use this data: 3,756 as the closing price on December 31, 2020, and 4,766 on December 31, 2021. Subtract: 4,766 - 3,756 = 1,010. Divide: 1,010 / 3,756 = 0.269, or about 27% when rounded.
You can repeat this for any period—months, years, whatever. Compile those individual returns into a data set, and then you or I can analyze them for trends or similarities between periods.
Historical Chart Patterns
Unlike fundamental analysis, which looks at a company's financials, technical analysis forecasts price directions by studying chart patterns. It relies on past market data like price moves, volume, and momentum.
I often analyze historical returns for trends or patterns that match current financial and economic conditions. Technical analysts like me believe that market outcomes might follow past patterns, so there's value in studying these trends. That said, technical analysis works best for short-term price movements in fluctuating assets, like commodities.
For longer-term trends, they usually tie more to economic conditions and the asset's market outlook. Take a stock's long-term historical return over years—it's more about the industry's prospects and the company's performance than any chart pattern.
Analyzing Historical Returns
In practice, analyzing historical returns often gives mixed results for spotting trends. Markets and economies are dynamic and evolving, so they repeat sometimes, but it's hard to predict when past returns will reappear.
Similar Events: Recessions
Still, there's merit in this analysis because it offers insight into what might happen soon. For example, the 2020 recession could prompt you to compare the S&P 500's 2020 return to the 2008-2009 recession.
In recessions, things like exogenous events, economic conditions, and spending patterns affect the stock market differently each time. So when comparing historical returns, consider the drivers behind them. If the causes in the past differ from now, future returns probably won't match the historical ones.
Conclusions
Studying historical returns might not give you a crystal ball for investments. Instead, it provides context for the current situation. By seeing how an asset behaved in past circumstances, you get an idea of how it might react soon—though the exact return won't be the same.
From there, you can plan your asset allocation—what to invest in—and build a risk management strategy if prices move against you. In essence, historical returns analysis won't predict the future, but it helps you stay informed and prepared for what's ahead.
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