When judging mutual fund performance, people often look at trailing returns. Trailing returns ask the question, "how has this fund done in the past year, past three or five or ten years?" Returns are simply the price change over the given period, expressed as a percentage of the starting price.
The starting date matters a lot in measuring returns. As price of funds or stocks changes every day, moving the starting date a few days around can make a huge difference. If a stock is at $110 today, measuring from a $100 starting point gives you a 10% gain, but if it traded at $95 around that time gives you a nearly 16% return - what a difference a day makes!
The implications for funds are more interesting still. Five years ago on Valentines Day S&P 500 closed at 1348.86, one year later it closed at 789.17. Yesterday the closing price was 1521.38, this made a 2.4% annual return for the past 5 years, but a 17.8% annual return for the past 4. Clearly, the day you measure from matters.
These returns are so dramatically different because of the massive drop in the market from the end of 2007 to the beginning of 2009. When you measure from a market peak - most returns will look lackluster, but measuring from a trough will make them look exceptional. Keep starting dates in mind when looking at trailing returns, and make sure to compare them to something you have a better grip on.
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