Why annualised return matters more than total profit

Most people who invest on the side track the wrong number.

They open their broker app, see that their portfolio has grown from $20,000 to $23,500, and think: "Great, I've made $3,500." That's true. But it tells you almost nothing useful.

The problem with total profit

Imagine two investors:

• Investor A put in $20,000 three years ago and now has $23,500. That's a $3,500 gain, or 17.5% total return.
• Investor B put in $20,000 one year ago and now has $23,500. Same dollar amount, same total return percentage.

These two situations are completely different. Investor B is doing far better. They generated the same return in one third of the time.

Total profit conflates how much you've made with how long it took to make it.

What annualised return actually tells you

Annualised return (also called CAGR — compound annual growth rate) normalises performance for time. It asks: if this return happened every year, what annual percentage would that be?

• Investor A: 5.5% per year
• Investor B: 17.5% per year

Now the difference is obvious. And more importantly, now you can compare against a benchmark.

If the S&P 500 returned 12% over the same period Investor A held their portfolio, they underperformed — even if their absolute return looked similar.

How Finance Watchtower uses this

We calculate your annualised return automatically from your holdings and purchase dates. You don't need to know the formula — we just show you the result alongside the benchmark you're tracking.

The question we're trying to answer isn't "have I made money?" It's "is my portfolio keeping pace with a simple index fund?"

Annualised return is the only metric that answers that honestly.