What can we see on the chart?
Monthly return on investment can be calculated for the actual day and previous dates as well.
In example the monthly return of equities
on 24-07-2012 will be the price increase of shares compared to the price on 24-06-2012,
on 23-07-2012 will be the price increase of shares compared to the price on 23-06-2012
If the return is calculated for each day, data can be used for drawing a chart.
If this is done for different time-ranges, then for example: we can get a graph showing a single month’s, three months’ etc., up to five years’ return (to determine 5 years’ return, at least 5 years’ data is required. Thus for example if we have 6 years’ amount of data, the graph of the 5 years’ return will only cover a one year time-range).
If we wish to compare a monthly graph with a three-year graph, it is practical to project both to a one year period (“annualizing”). (To do so, multiply the monthly return by 12, and calculate annual return from the three-year return value using the compound interest method.)
If this is carried out for every day and all time-ranges, the graphs will show the rate of variation of the annual return along various time-ranges. [refer to the Figure below].
What is this chart useful for?
One expects that long-term investments result in more certain profits than short-term ones.
The above Figure also supports this statement. The single month’s return on equities varies to a great degree, while the graph of three-years’ return is almost smooth.
BUT: not all long-term investments realize equally steady returns!
Long-term investment is influenced by numerous factors.
- In case of single stocks, long-term performance is highly influenced by the business sector and country of operation of the given enterprise. In case of shares, it is difficult to forecast how steady the long-term performance of the shares will be based on data from the past.
- But there are some investment funds, where the subject of investment is selected from an extensive range of possibilities. (For example: some hedge funds.) These are not bound to invest in a given country, or in a given business sector, but they must provide the best possible results from the money entrusted to them under all circumstances. It is practical to compare these types of investment funds based on the long-term returns they have achieved.
This chart also allows calculation of a percentage amount of time, when returns exceed a given threshold value. This is an important piece of information for long-term potential, as an estimate can be given for example for the chance that three-year returns will be greater than annual 10%. (Provided, that enough data for this is available! It must be noted however, that past behavior does not represent any guarantee in terms of future performance!)
How can the chart be used?
The time window shown on the chart can be adjusted using the sliders.
Display of each graph can be enabled or disabled using the checkboxes on top of the chart. (When interested in three-year and five-year graphs, it is practical to switch off the widely varying monthly graph, as a result of which the chart will be automatically resized to a narrower range.)
To calculate for example how often did three-year returns exceed 10% in the past, select “3 years” from the drop-down menu under the chart and enter “10%” in the text box. Relative frequency will be shown in the field with grey background (69.2% in the given example) while threshold is displayed on the chart in red. (The result is based on the longest possible time range that can be calculated from loaded data.)