You will be able to annualise returns correctly and recognise when a chosen start or end date distorts a track record.
Marcus's friend sends him a screenshot in the group chat: a fund up 6% in three months. "That's 24% a year," the friend writes. A week later a different friend shares a thematic fund's page showing 140% since launch. Neither number is false. Both are built to make you feel something before you've checked what they measure.
This reading covers three things to check before any return figure goes into your workbook: how long the period is, whether the figure is cumulative or annualised, and who picked the start date.
Annualising turns a return over some period into the yearly rate that would compound to it. For periods longer than a year that is useful, because it lets you compare a three-year record with a ten-year one.
For periods shorter than a year it invents data. Compounding 6% over four quarters gives 1.06 to the fourth power, minus one: about 26% a year, not the 24% Marcus's friend got by multiplying. Either figure assumes the next three quarters will look like the last one, and nothing about a single quarter tells you that. A good quarter in a volatile fund is mostly noise. Fund reporting standards such as GIPS forbid annualising periods under a year for exactly this reason, and you should hold your own workbook to the same rule. A return under a year is shown as what it is: 6% over three months.
A cumulative return is the total change over the whole period. An annualised return is the compound yearly rate that produces it. Fund pages often show both, sometimes in neighbouring columns, and marketing tends to lead with whichever sounds bigger.
Take made-up figures. A fund that doubled in ten years has a cumulative return of 100%. Its annualised return is two to the power of one tenth, minus one: about 7.2% a year. Both describe the same history. A fund that gained 61% over five years has an annualised return of about 10% a year, which beats the first fund on a yearly basis even though its headline number is smaller.
So check the column header every time. "Since launch" figures are almost always cumulative. "Annualised" or "p.a." should be stated for anything longer than a year. If a figure doesn't say, assume cumulative until you've confirmed otherwise, and convert it yourself with the formula from lesson 1.1: ending value over starting value, to the power of one over the number of years, minus one.
Here is a made-up world equity index over ten years, with yearly returns in SGD of 15%, minus 9%, 24%, 7%, 16%, 12%, minus 16%, 20%, 8% and 13%. Over the full ten years it compounded at about 8.3% a year.
Now let a fund manager pick the window. Start at the end of year two, right after the fall, and the next eight years compound at about 9.9% a year. Take only years three to five and you get about 15.5% a year. Start at the end of year six, just before the second fall, and the three years that follow compound at under 3% a year. Same index, same decade, and a "track record" anywhere from under 3% to over 15% a year depending on the window.
Starting a record at a market low makes almost anything look strong, because the first years catch the rebound. You'll see it in fund launches timed after a crash, in strategy backtests that begin in March 2009, and in the friend who says their stock picks have doubled "since I started", when they started at the bottom of 2020. The return is real. What it tells you about skill is close to nothing.
End dates get picked too. A factsheet printed just after a strong quarter shows better one, three and five-year numbers than the same fund's factsheet a quarter earlier, and the fund changed nothing.
The fix is to stop looking at one window. A rolling return calculates the return over every window of a given length in the history: every three-year period, every five-year period, and so on.
For the made-up index above there are eight three-year windows in ten years. Their annualised returns run from about 2.9% to about 15.5% a year. That range is far more honest than any single figure. It tells you what an investor who happened to arrive at a bad moment would have earned, as well as a lucky one. If you only remember one thing from it, remember the worst window, because that's the one you might live through.
In a spreadsheet you need a column of period-end values, then a formula that divides each value by the value three years earlier, raises it to the power of one third and subtracts one. Drag it down and you have the rolling series. Monthly data gives you many more windows than yearly data and a better sense of the spread.
Rolling returns won't stop cherry-picking by others, but they stop you from fooling yourself, and they make a single headline figure look as narrow as it is. Look at the periods your own fund factsheets choose to show. Each one is a start date someone else picked, and the activity asks you to find the one that flatters most.
Pick a fund factsheet, find the periods it reports, and write down which start date flatters it most.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).