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 the returns were rounded to the nearest number 1the 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 patternsin 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 23the historical returns are often analyzed for trends or patterns that may align with current financial and economic conditions 2 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 returnsin 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 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 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 circumstances 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 