# What Are Trailing Returns and How Are They Calculated?

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Updated on March 29, 2023

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Trailing returns are a measure of an investment's performance over a given period of time, usually one year.

They are calculated by subtracting the current price from the price of the investment at the beginning of the period and then dividing that number by the price at the beginning of the period.

Trailing returns can be used to evaluate an investment's performance over a specific time horizon.

Trailing returns can also be used to compare the performance of investments in a portfolio over a single period.

## Why Do Investors Use Trailing Return?

Investors use trailing returns because they offer a way to measure an investment's performance over time without having to make assumptions about future price movements.

Trailing returns depend only on what has happened in the past and do not have to take into account any predictions about future performance.

In addition, they are easy to calculate and use.

## How to Calculate Trailing Returns on an Investment Portfolio?

There are two different ways to calculate a trailing return:

### Absolute Trailing Returns:

To calculate an absolute trailing return, you need the following information:

• The beginning and end prices of the investment
• The number of days in the period being measured

Here's how to calculate a trailing return using this information:

Step 1: Subtract the current price from the beginning price to get the change in value for the period.

Step 2: Divide the change in value by the beginning price to get the percentage return for the period.

### Relative Trailing Returns:

To calculate a relative trailing return, you need the following information:

• The beginning and end prices of the investment
• The beginning and end prices of a benchmark investment

Here's how to calculate a trailing return using this information:

Step 1: Subtract the current price from the beginning price of the benchmark investment to get the change in value for the period.

Step 2: Divide the change in value by the beginning price of the benchmark and multiply by 100. This will give you a percentage return on the benchmark investment for this period.

Step 3: Subtract your current price from your beginning price to get the change in value for this period.

Step 4: Divide the change in value by the beginning price and multiply by 100 to get your percentage return on an absolute basis for this period.

## How to Interpret Trailing Returns?

One way to interpret trailing returns is by comparing them to the benchmark that was used in the calculation.

Trailing returns on an absolute basis can give you an idea of how much an investment has grown on a nominal basis over time, which can be compared to the benchmark.

Trailing returns relative to a benchmark can tell you whether or not an investment has outperformed or underperformed the benchmark over the time horizon being measured.

Some individuals are tempted to compare trailing returns across different investments at different points in time.

This is generally not recommended because the results of this type of comparison will be skewed by factors such as the overall stock market.

For example, if the stock market is doing well and your investment portfolio is not, then the trailing return will be lower than it would have been had you invested in a different time period.

Also, past performance does not guarantee future performance and should therefore not be used to determine an investment's potential.

## What Should I Consider Before Investing in Stocks With High Trailing Returns?

There are a few things you should keep in mind when considering an investment in stocks with high trailing returns.

First, remember that past performance is not indicative of future results. Secondly, it is important to understand the risks associated with investing in these types of stocks.

High trailing returns are usually associated with higher risk investments because the stock's performance has been very volatile, which means that future strong performances are less likely to be repeated.

Also, many high-performing stocks are in industries that are generally considered "high growth" or "high capital intensity."

Some of these include technology companies, biotechnology companies, and pharmaceutical companies.

## The Bottom Line

Trailing returns are a way to measure an investment's performance over a specific period of time.

Absolute trailing returns measure the change in the value of an investment against the initial investment amount, while relative trailing returns measure the change in the value of an investment against a benchmark.

Trailing returns can be used to compare an investment's performance to a benchmark, to understand an investment's volatility, and to determine if an investment is a good fit for your portfolio.

However, it is important to keep in mind that past performance is not always indicative of future results.​​​​​​​