Double your money is considered a badge of honour and used to bragging rights at Thanksgiving dinner tables and parties. Overzealous advisors, or worse, fraudsters, can make bogus promises to double your money. The urge to double one’s money may be rooted in investor psychology, the risk-taking side of us that is obsessed with the quick buck. Two critical factors that must be taken into consideration when trying to double your money are time and risk. This includes your (investing) risk tolerance and time horizon, as well the characteristics of the investment, such as how long it will take for the investment’s value to double. The latter is also a function the investment’s riskiness.
Time Horizon and Risk Tolerance
Your investment time horizon is a key determinant of how much risk you are willing to take. It is also dependent on your age andinvestment goals. A young professional may have a long investment time horizon. This allows them to take on significant risk and help recover from losses. What if they are saving for a house purchase in the next year? Their risk tolerance will be low in this case because they can’t afford to lose much capital in an event of a market correction that could jeopardize the primary investment goal of buying a house.
How long does it take for one to double his money?
The Rule 72 is an easy way to calculate how long it takes for an investment, if it grows annually, to double. Divide 72 by the expected annual return. This will give you the time it takes to double your money.
The Rule of 72 is a good estimate of the time it takes to double the return for low rates of returns . The Rule of 72 estimates “time to double” at high returns rates but this estimate is less accurate. As you can see in the chart below, the estimated time it will take to double an investment’s value in years (in years) are compared to the actual amount of time.
Five ways to double your money
Double your money is a feasible goal that most investors can achieve and not as intimidating as it might seem for new investors. However, there are some caveats:
- Tell yourself and your advisor (if you have one) what your tolerance for risk is. It’s not good to discover that you can’t handle volatility when the market plummets 20%. This could be very damaging to your financial health.
- Do not let greed and fear, which are the main emotions driving most investors, have an adverse effect on your investment decisions.
- You should be very cautious about getting rich quick schemes promising you “guaranteed” high-quality results with low risk. There are many investment scams that are out there, so be cautious if you are promised high-quality results with minimal risk. It doesn’t matter if it’s your broker or your brother-in law, but take the time to verify that they aren’t using your to double your money.
There are five main ways to double your money. Your risk appetite and investment time frame will determine which method you choose. To double your money, you might also consider combining these strategies.
1. The Classic Way – Earning It Slowly
Investors who have been around a while will recall the Smith Barney advertisement from 1980s. In it, John Houseman, a British actor, informs viewers that they make their money the old-fashioned manner–they earn it .
The commercial for the traditional way to double your money isn’t far off the mark. A solid portfolio with a mix of investment-grade bonds and blue-chip stock is the best way to double your income over a reasonable time.
The S&P 500 Index, the most popular index of blue-chip stocks, has returned 9.8% annually (including dividends), from 1928 to 2020 1. Investment-grade corporate bonds have returned 7.0% 1 during this 93-year span. A classic 60/40 portfolio would have returned 8.7% annually over this period (60% equities and 40% bonds). According to the Rule of 72, such portfolios should double in 8.3 years and quadruple within 16.5 years.
However, it is important to remember that such impressive results often come with a lot of volatility. Investors should be prepared for sharp drawdowns from time to time, such as the 35% plunge of the S&P 500 in six weeks during the first quarter 2020 when the global coronavirus pandemic hit.
Additionally, historical norms may have lower returns than the historical norm. The S&P 500, for example, recovered in record time from the 2020 plunge and powered to new records by year-end 2020. The S&P 500 returned a staggering 100% total return from 2019-2021. However, future returns could be much lower.
2. Contrarian Way – Blood in the Streets
Even the most inexperienced investor will know that you have to buy at some point. Not because everyone else is buying, but because everyone else is losing out.
Stock prices can sometimes slump when many people turn their backs to great athletes. This happens just like great athletes experience slumps. According to Baron Rothschild, smart investors “buy when blood is in the streets,” even if it is their blood.
No one is suggesting that you should purchase garbage stocks. Investors who do their research will find that good investments are sometimes overpriced. This presents an opportunity to buy.
To determine whether a stock is overvalued, you need to look at the price/earnings ratio as well as the book value. Both these measures are based on historical norms that have been established for specific markets as well as for certain industries. Smart investors see an opportunity to double their capital if companies fall below historical norms due to systemic or superficial reasons.
3. The Safe Way
You can double your money in a number of ways, including the fast and slow lane. Bonds can be a safer option if you want to make the same trip but not as exciting.
For example, zerocoupon bonds. Zero-coupon bonds can seem intimidating to the uninitiated. They are easy to understand. Instead of buying a bond that pays you regular interest, you purchase a bond at a discount relative to its eventual value at maturation.
The absence of reinvestment risks is one hidden advantage. Standard coupon bonds come with the risks and challenges of reinvesting interest payments after they are received. Zero-coupon bonds only pay one dividend, which is when the bond matures. Zero-coupon bonds can be very sensitive to interest rate changes and may lose value as they rise. This is something investors should consider if they do not plan to hold zero-coupon bonds to maturity.
4. The Speculative Way
Some investors find it easier to be steady than others. If you have a high level of risk tolerance and a small amount of investment capital, aggressive strategies are the best way to increase the nest egg. These include options, margin trading and penny stock. In recent years, cryptocurrency. A nest egg can be super-shrunk by anyone.
Stock options such as simple put or calls can be used to speculate about any stock. Options can be a great way to boost a portfolio’s performance, especially for those who are experts in a particular industry.
5. The Best Way
Although it isn’t as entertaining as watching your stock trade on the evening news, the undisputed champion is the employer’s match contribution to a 401(k) retirement plan or other employer-sponsored retirement plan. Although it’s not glamorous and won’t impress your neighbors, the automatic 50 cents per dollar that you save is hard to beat.
Even better, the money that goes into your plan is taken directly from your employer’s tax returns to the IRS 3 Most Americans find that every dollar they invest costs only 65 to 75c.
You can still invest in a Roth IRA or traditional IRA even if you don’t have a 401k plan. Although you won’t be eligible for a company match the tax benefits alone are substantial. Traditional IRAs have the same tax benefits as 401(k)s. A Roth IRA has the same immediate tax benefit as a 401(k).
Both are good deals for taxpayers. If you are young, consider the Roth IRA. Capital gains are exempt from capital gains tax. This is a great way to increase your effective return. The government will match a portion of your retirement savings if your income is low. The Retirement Savings Credit lowers your tax bill by between 10% and 50% depending on how much you contribute.