How returns are measured
"How much did I make?" has more than one honest answer once money goes in and out at different times. Here are the two that matter.
Why the simple sum misleads
Your account grew from $1,000 to $3,000. Great return? Not if you added $1,500 along the way. Money you put in isn't profit, so a fair measure has to take deposits and withdrawals out.
Time-weighted: how the investments did
The time-weighted return chains together the growth between every deposit and withdrawal, so their size and timing don't count. It answers how well your choices did, and it's the number to compare with a fund or the S&P 500.
Money-weighted: how your money did
The money-weighted return (also called the internal rate of return) does count timing: a big deposit just before a drop hurts it. It answers how your actual money fared, as a yearly rate.
Per year
40% over five years and 40% over one are very different. Annualised returns turn any period into a yearly rate, so they can be compared.