What are 'Historical Returns'

Historical returns are often associated with the past performance of a security or index. 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 demand. Historical returns can also be useful when estimating where future points of data may fall in terms of standard deviations.

BREAKING DOWN 'Historical Returns'

Looking at historical data can provide some insight into how a security or market has reacted to a variety of different variables, from regular economic cycles to sudden world events. Investors looking to interpret historical returns should keep one caveat in mind: you can't assume that the future will be like the past. The older the historical return data is, the more likely it is to be less useful when predicting future returns.

In contrast to traditional fundamental analysis methods, technical analysis is an analysis methodology used for forecasting the direction of prices through the study of past market data, primarily price and volume. Here, 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 hidden value available from the study of historical return trends.

In reality, results are mixed. As a dynamic and ever-evolving system, markets and economies at times repeat, but it is very difficult to anticipate when what's happened in the past will happen in the future. As such, you'd be hard-pressed to find financial literature that does not prominently feature the expression: past results are no indicator of future results. But euphoria and optimism prevail, and investors and their advisors erroneously put more weight on historical returns than they should.

When using historical returns, large-cap securities may exhibit more regular patterns than small cap securities. This is because large-cap securities have more liquidity than small-cap stocks.

RELATED TERMS
  1. Historical Currency Exchange Rates

    Historical exchange rates are exchange rates that are used to ...
  2. Pattern

    In technical analysis, the distinctive formation created by the ...
  3. Total Return

    Total return is a performance measure that reflects the actual ...
  4. Abnormal Return

    A term used to describe the returns generated by a given security ...
  5. Mean Return

    1. In securities analysis, it is the expected value, or mean, ...
  6. Active Return

    Active return is the percentage gain or loss of an investment ...
Related Articles
  1. Investing

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
  2. Trading

    Intro to Types of Trading: Technical Traders

    Explore in detail the technical trading approach, which looks to the past to predict the future.
  3. Investing

    Russell Rebalance Study: What You Need to Know

    Analyze the recent stock performance for different types of stocks to determine which equities could gain or benefit ahead of Russell index reconstitution.
  4. Investing

    How to Pick Your Investments

    Understanding the basics doesn’t take long. However, mastering the nuance of every available investment could take a lifetime.
  5. Investing

    Stock Shock! Why Your Returns May Plunge By Half

    History shows that stock market returns plunge sharply from their peak
RELATED FAQS
  1. Which investments have the highest historical returns?

    Stocks are historically considered the best investment in terms of rate of return. Historically, they outperform other investments ... Read Answer >>
  2. Where can I find historical stock/index quotes?

    Finding historical quotes on stocks and indices online has never been easier. Use Investopedia's historical data tool for ... Read Answer >>
  3. How do I find historical prices for stocks?

    Historical stock prices help investors evaluate a company's performance in the public markets over time, and can be a valuable ... Read Answer >>
  4. What is the historical market risk premium?

    Learn what the historical market risk premium is and the different figures that result from an analyst's choice of calculations ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center