|By Nathan Young|
May 23, 2017
A typical data point many review before investing is the return of an equity. Of course you look as far back as you would like, but typically there is the year to date, one year, three year, and five year, which is what we will be talking about in this article.
Utilizing the five year return allows you to see many different aspects the shorter term returns may omit. Business tendencies during different parts of the year may be picked up over a five year return. Also, you can take a look at different macro events such as the location of the business cycle as a whole.
If you are a day trader or short term trader, then the five year return approach may not fit your profile because you are looking more closely at the here and now, rather than what happened five years prior. For people who are looking to buy and hold, the five year return might be up your ally.
When looking at returns, it is important to narrow in on specifics because the five year return may not fit for every equity. If you are looking at a target date mutual fund, odds are the five year return will be steadily increasing due to its agenda. It is different too if you are looking at an ETF that tracks the broader market, which may not warrant a look at the five year return because the overall market tends to increase, even after difficult economic events such as 2008 and the great depression.
You can also utilize the five year return to look at where the stock has been compared to where you believe the stock can go, giving you a potential price target. Price targets do not have a set formula to use, but looking at historical events can certainly give you an insight to how a company may react if it were to happen again.
When looking into the past, you do not want to become romantic and lose sight of the future, because the company and yourself need to be forward looking. History is great to learn from and understand how a company or equity may react, but don’t let the hinder your ability to predict the future with as much accuracy as you can. Find the right return history for your current investing and trading profile and include it with your research. I would compare it to salt in a dish, enough makes everything pop, but too much can ruin what you already have.