How to Figure Trailing Returns
- 1). Determine what specific attribute of an investment you would like to measure. For example, to understand how a particular mutual fund performs during poor economic conditions, use a trailing return of one year (during the most recent downturn) dating from October 2008 to the end of September 2009 to see how well the fund weathered these difficult conditions.
- 2). Compare trailing returns with like investments to get a good measure of performance. Some investors make the mistake of comparing entirely different investment types or classes (bonds versus stocks, for example), which each have attributes that perform differently in different market conditions.
- 3). Figure the trailing return by first selecting the appropriate time frame: three-month, six-month, one-year, three-year, five-year and 10-year and since inception are fairly common return periods. Then take the change in the current net asset value (NAV) of a mutual fund, stock price of an individual security or bond price of a bond from its value on the date selected, and divide it by the initial value. For example, if the NAV on January 1, 2010, was $10 and the NAV on December 31, 2010, was $12, the 12-month trailing return is 20 percent ($12 - $10 = $2, then divide $2 by $10). The same calculation will apply for whatever time frame you choose.
- 4). Determine if interest, dividends, realized capital gains and investment charges (if any) are factored into the trailing return calculation. There are different schools of thought regarding this determination. However, to get a true and accurate view of a trailing return, it should reflect how much money was actually invested (less charges, loads or commissions paid to invest) and all the ways the investment generated returns, such as dividends or interest. If these factors are not considered, the trailing return will not accurately reflect the investment's monetary value.
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