Most investment returns are stated in the form of an annual return, or an annual average return.
For example, if an investment states that last year it had a one year return of 9% that usually means if you invested on January 1, and sold your investment on December 31, then you earned a 9% return.
If the investment states that it had an 8% annualized return over ten years, that means if you invested on January 1, and sold your investment on December 31 exactly ten years later, you earned the equivalent of 8% a year. However, during those ten years, one year the investment may have gone up 20% and another year it may have gone down 10%. When you average together the ten years, you earned the “average annualized” return of 8%.
This average return is similar to saying that you went on a trip and averaged 50mph. You know that you did not actually travel 50mph the whole time. Sometimes you were traveling much faster; other times you were traveling much slower.
Rolling returns provide a more realistic way of looking at investment returns. A ten year rolling return would show you the best ten years and worst ten years you may have experienced by looking at the ten year periods not just starting with January, but also starting February 1, March 1, April 1, etc.The same investment that had a ten year average annual return of 8% may have a best ten year rolling return of 12% and a worst ten year rolling return of 3%. Rolling returns give you a more realistic idea of what might really happen to your money, depending on the particular ten years that you are invested.
Using a rolling return would be like saying that over a long trip, depending on the weather conditions, you might average 45mph, or you might average 65mph.
To see rolling returns for various stock and bond indexes see Best and Worst Rolling Index Returns.
