Historical Returns: Definition, Uses, and How It's Calculated (2024)

What Are Historical Returns?

Historical returns are often associated with the past performance of a security or index, such as the . Analysts review historical return data when trying to predict future returns or to estimate how a security might react to a particular situation, such as a drop in consumer spending. Historical returns can also be useful when estimating where future points of data may fall in terms of standard deviations.

Key Takeaways

  • Historical returns are often associated with the past performance of a security or index, such as the S&P 500.
  • Investors study historical return data when trying to forecast future returns or to estimate how a security might react in a situation.
  • Calculating the historical return is done by subtracting the most recent price from the oldest price and divide the result by the oldest price.

Understanding Historical Returns

Analyzing historical data can provide insight into how a security or market has reacted to a variety of different variables, from regular economic cycles to sudden, exogenous world events. Investors looking to interpret historical returns should bear in mind that past results do not necessarily predict future returns. The older the historical return data, the less likely it'll be successful at forecasting returns in the future.

A historical return for a stock index such as the S&P 500 is typically measured from the open on January 1st to the market's close on December 31st to provide the annual return. Each year's annual return is compiled to show the historical return over several years. Investors can also calculate the average historical return, i.e., a stock has returned an average of 10% per year for the past five years. However, it's important to note that an average historical return doesn't mean that the stock price didn't correct lower in any of those years. The stock could have experienced price declines, but in the other years when the stock price rose, the gains more than offset the declines so that the average historical return was positive.

Investors can calculate the historical return for any investment, including the value of a home, real estate, mutual funds, and exchange traded funds (ETFs), which are funds containing a basket of various securities. Investors also use historical returns to measure the price performance of commodities such as gold, corn, wheat, and silver.

How to Calculate Historical Returns

Calculating or measuring the historical return of an asset or investment is relatively straightforward.

Subtract the most recent price from the oldest price in the data set and divide the result by the oldest price. We can move the decimal two places to the right to convert the result into a percentage.

For example, let's say we want to calculate the return of the S&P 500 for 2019. We start with the following data:

  • 3,756= the S&P 500 closing price on December 31, 2020
  • 4,766 = the S&P 500 closing price on December 31, 2021
  • 4,766 - 3,756 = 1,010
  • 1,010/3,756 = .269 or 27%*

*The returns were rounded to the nearest number.

The process can be repeated if an investor wanted to calculate the return for each month, year, or any period. The individual monthly or yearly returns can be compiled to create a historical return data set. From there, investors and analysts can analyze the numbers to determine if there are any trends or similarities between one period or another.

Historical Chart Patterns

In contrast to traditional fundamental analysis, which measures a company's financial performance, technical analysis is a methodology that forecasts the direction of prices through the study of charting patterns. Technical analysis uses past market data, such as price moves, volume, and momentum.

The historical returns are often analyzed for trends or patterns that may align with current financial and economic conditions. Technical analysts believe potential market outcomes may follow past patterns. Hence, there is a hidden value available from the study of historical return trends. However, technical analysis is more often applied to short-term price movements of those assets that frequently fluctuate in price, such as commodities.

Longer-term price trends tend to follow economic conditions and the long-term market outlook for the asset or investment. For example, the long-term historical return of a stock price over several years will likely have more to do with the market outlook for that industry and the company's financial performance than any technical charting pattern.

Analyzing Historical Returns

In reality, historical returns analysis often yields mixed results in determining trends. As a dynamic and ever-evolving system, markets and economies at times repeat, but it can be difficult to anticipate when past returns will occur again in the future.

Similar Events: Recessions

However, there are some merits to analyzing historical returns since we can gain insight as to what we might be in for in the near future. For example, the recession in 2020 might lead investors to compare the S&P 500 return in 2020 to the last time the U.S. experienced a recession; in 2008 and 2009.

In the context of recessions, exogenous events, economic conditions, and the resulting business and consumer spending patterns affect the stock market differently in each recession. As a result, when comparing historical returns, the drivers of those returns should be considered before concluding that a trend exists. If the underlying catalysts for the historical returns are completely different than the current situation, it's likely that the future returns will not mirror the historical returns analysis.

Conclusions

Perhaps the conclusions drawn from the study of historical returns don't provide investors with a crystal ball. Instead, the analysis provides context into the current situation. By knowing how an asset's price behaved under certain circ*mstances in the past can provide insight as to how it might react in the near future–with the understanding that the return won't be the same.

From there, investors can plan their asset allocation, meaning what types of holdings to invest in, and develop a risk management strategy in case the price of the market or asset moves adversely. In short, historical returns analysis might not predict future price movements, but it can help investors be more informed and better prepared for what the future holds.

Historical Returns: Definition, Uses, and How It's Calculated (2024)

FAQs

Historical Returns: Definition, Uses, and How It's Calculated? ›

To begin calculating the historical returns, the difference between the most recent price and the past price needs to be computed and then divided by the past price multiplied by 100 to get the result as a percentage. The calculation can be done iteratively to cater for longer time periods – e.g., 5 years or more.

How do you calculate historical return? ›

Calculating or measuring the historical return of an asset or investment is relatively straightforward. Subtract the most recent price from the oldest price in the data set and divide the result by the oldest price. We can move the decimal two places to the right to convert the result into a percentage.

What is the meaning of historical return? ›

Historical returns are the past performance of a security or index, such as the S&P 500. Analysts review historical return data when trying to predict future returns or to estimate how a security might react to a particular economic situation, such as a drop in consumer spending.

What are returns and how are they measured? ›

A rate of return (RoR) is the gain or loss of an investment over a specified period of time, expressed as a percentage of the investment's cost. Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.

What is the historical risk return? ›

Historical market risk premium refers to the difference between the return an investor expects to see on an equity portfolio and the risk-free rate of return. The risk-free rate of return is a theoretical number representing the rate of return of an investment that has no risk.

How are returns calculated? ›

Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100. ROI has a wide range of uses.

What is the difference between historical returns and expected returns? ›

Historical returns of a stock or portfolio of stocks were the actual returns in the past. Since the past performance is your best predictor of success (Jim Simons, 2005), your best predictor of expected returns is usually taken as an annual average of your historical returns.

What is an example of historical data? ›

By definition, historical data includes most data generated either manually or automatically within an enterprise. Sources, among a great number of possibilities, include press releases, log files, financial reports, project and product documentation and email and other communications.

What is historical stock return average? ›

The historical average yearly return of the S&P 500 is 9.24% over the last 150 years, as of the end of February 2024. This assumes dividends are reinvested. Adjusted for inflation, the 150-year average stock market return (including dividends) is 6.92%.

What is variance of historical returns? ›

Let's start with a translation in English: The variance of historical returns is equal to the sum of squared deviations of returns from the average (R) divided by the number of observations (n) minus 1. (The large Greek letter sigma is the mathematical notation for a sum.)

What is the simplest measure of return? ›

The simple rate of return is a basic return measure that requires only two inputs. It takes the increase in accounting net income from an investment and divides it by the cost of the investment. This method measures the additional profit each year from a capital investment.

What is an example of return? ›

Examples of return in a Sentence

I have to return a book to the library. I'm returning your ladder. Thanks for letting me borrow it. The dishes were broken when they were delivered, so I had to return them.

Is higher risk associated with higher historical returns? ›

Definition: Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off….

What is the use of historic prices? ›

Historic pricing is a unit pricing method used to calculate the value of an asset using the last valuation point calculated. Historic pricing is used when the value of an asset does not update in real time.

How do you calculate return risk? ›

Like R-squared, the Treynor method is used to measure reward for units of risk taken on by an investment portfolio or fund. To calculate risk-adjusted returns via the Treynor method, follow this formula: Treynor Ratio= (Average Investment Portfolio Return – Average Risk-Free Rate)/ Portfolio Beta.

How do you calculate return on investment for the past year? ›

For example, suppose Jo invested $1,000 in Slice Pizza Corp. in 2017 and sold the shares for a total of $1,200 one year later. To calculate the return on this investment, divide the net profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for an ROI of $200/$1,000, or 20%.

How do you calculate returns over two years? ›

To calculate the total return rate (which is needed to calculate the annualized return), the investor will perform the following formula: (ending value - beginning value) / beginning value, or (5000 - 2000) / 2000 = 1.5. This gives the investor a total return rate of 1.5.

What is the average annual historical return? ›

Average annual return of the S&P 500

Over the long term, the average historical stock market return has been about 7% a year after inflation.

Top Articles
Latest Posts
Article information

Author: Fredrick Kertzmann

Last Updated:

Views: 6477

Rating: 4.6 / 5 (66 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Fredrick Kertzmann

Birthday: 2000-04-29

Address: Apt. 203 613 Huels Gateway, Ralphtown, LA 40204

Phone: +2135150832870

Job: Regional Design Producer

Hobby: Nordic skating, Lacemaking, Mountain biking, Rowing, Gardening, Water sports, role-playing games

Introduction: My name is Fredrick Kertzmann, I am a gleaming, encouraging, inexpensive, thankful, tender, quaint, precious person who loves writing and wants to share my knowledge and understanding with you.