What are historical returns?

Historical returns refer to the previous performance of a security or index, such as the S&P 500. Analysts study historical return data to anticipate future returns or assess how security may react to a particular scenario, such as a decrease in consumer spending. Historical returns can help predict future data points’ standard deviations.

Knowing Historical returns

Historical data analysis reveals how a security or market responds to various factors, including economic cycles and external shocks. Investors interpreting historical performances should remember that previous outcomes may not guarantee future returns. Historical return data is less likely to predict future returns as it ages.

Stock indexes like the S&P 500 measure yearly performance from January 1 to December 31. Compiled yearly returns indicate multiple years’ historical returns. Investors can determine the average historical return, such as a stock returning 10% per year for five years. However, an average historical return doesn’t indicate the stock price didn’t fall in any of those years. The stock price may have dropped, but the gains in previous years more than compensated for the losses, resulting in a positive average historical return.

Investors may calculate the historical return of any investment, including homes, real estate, mutual funds, and ETFs, which hold a basket of stocks. Investors assess commodity prices using historical returns, including gold, maize, wheat, and silver.

Calculating Historical Returns

The historical return of an item or investment is easy to calculate.

Subtract the latest price from the oldest and divide by the oldest. Moving the decimal two places to the right converts the result to a percentage.

Say we wish to compute the 2019 S&P 500 return. We begin with these data:

• The S&P 500 closed at 3,756 on December 31, 2020.
• The S&P 500 closed at 4,766 on December 31, 2021.
• 4,766 minus 3,756 = 1,010
• 1,010/3,756 = .269 or 27%*

*Rounding to the closest number.

Investors can repeat the process if they want to compute monthly, annual, or other returns. Compiling monthly or annual results creates a historical return data collection. Investors and analysts can then examine the statistics for patterns and similarities.

Historical Chart Patterns

Instead of measuring a company’s financial performance, technical analysis anticipates price direction by analyzing chart patterns. Technical analysis analyzes previous market data, including price, volume, and momentum.

Historically researched results may reveal patterns that match contemporary financial and economic situations. Technical experts expect market outcomes to repeat prior trends. Studying historical return trends might reveal hidden value. Technical analysis primarily focuses on the short-term price fluctuations of volatile assets like commodities.

Longer-term price movements follow economic circumstances and the asset or investment’s market outlook. The long-term historical return of a stock price over multiple years is more likely to reflect the industry’s market outlook and the company’s financial success than any technical charting pattern.

Historical Return Analysis

Trend analysis using historical returns frequently provides mixed results. Since markets and economies are dynamic and ever-changing, predicting when prior returns will occur again is hard.

Similar Events: Recessions

However, evaluating previous returns can help us predict the future. For instance, investors may compare the S&P 500 return in 2020 to the 2008 and 2009 recessions.

Exogenous events, economic circumstances, and corporate and consumer spending patterns impact the stock market differently during recessions. Thus, before assuming a trend, past return drivers should be explored. If the drivers of past returns are entirely different from the current condition, future returns may not match the analysis.

Bottom Line

Perhaps historical return studies don’t provide investors with a crystal ball. Instead, the analysis contextualizes the issue. Knowing how an asset’s price acted in the past can help predict its future behavior, but the return won’t be the same.

Investors can plan their asset allocation and build a risk management strategy in case of market or asset price fluctuations. Historical return research may not foretell future market fluctuations, but it can help investors prepare for them.

Conclusion

• Historical returns are commonly connected with securities or indexes like the S&P 500.
• Investors use past return data to predict future returns and assess security reactions.
• Subtracting the latest price from the oldest and dividing by the oldest yields the historical return.