Everyone is interested in doubling their money. But while it might
sound like a too-good-to-be-true gimmick, there are legitimate ways that
you can double your money without taking unnecessary risks, winning the
lottery, or striking gold.
Spend Less
The amount left over if you spend less money than you earn in income is your savings. Save three months of living costs into an emergency fund. After that, invest your savings.
You can invest it in tax-advantaged retirement accounts, such as a
401(k) or IRA, or you can invest your money in taxable brokerage
accounts.
If you buy passively-managed index funds (a fund that mimics a general index, such as the S&P 500), your investment will perform as well as the overall economy does.
From 1990 through 2017, the S&P 500 averaged about a 10 percent
annualized return on investment. That means that in any given year,
stocks may have risen or fallen. However, if you stayed invested throughout those 27 years, and you reinvested all of your gains, you would have earned roughly 10 percent per year.
Don’t forget, 1990 through 2017 is a time period that includes
several atypical events, like two massive recessions, several
corrections, as well as various bubbles.
How does this 10 percent return relate to doubling your money? Well, the Rule of 72
is a shortcut that helps you figure out how long it will take your
investments to double. If you divide your expected annual rate of return
into 72, you can find out how many years it will take you to double
your money.
Let’s say, for example, that you expect to get returns of 10 percent a
year. Divide 10 into 72, and you discover the number of years it takes
you to double your money, which is seven years.
By spending less than you earn, investing in an index fund that tracks the S&P 500, and reinvesting
your gains, you can double your money roughly every seven years,
assuming the stock market performs as it did during the 1990 through
2017 time period.
Bonds
Your mix of stocks and bonds
should reflect your age, goals, and risk tolerance. If you don’t fit
the profile of somebody who should be heavily invested in equities, such
as S&P 500 index funds, you can look to bonds to double your
money.
If your bonds return 5 percent on average every year, according to the Rule of 72 you can double your money every 14.4 years.
That might sound disheartening compared with doubling your money in
seven years, but remember that investing is a bit like driving on a
highway. Both fast drivers and slow drivers will ultimately reach their
destination. The difference is the amount of risk they assume to do so.
By obeying the speed limit, you put yourself in a position in which
you are likely to arrive at your destination in one piece. By stomping
on the accelerator, investors can either reach their final destinations
faster or crash and burn.
Driving is always risky, just as investing is always risky, but
certain investments expose you to higher levels of risk than
others, just as disobeying the speed limit exposes you to greater risk
than obeying the speed limit.
You can double your money by investing in bonds. It's likely to take longer, but you'll also decrease your risk.
Employer Match
If your employer matches your 401(k)
contributions, you have the easiest, most risk-free method of doubling
your money at your disposal. You will get an automatic increase on every
dollar that you put in up to your employer match.
For example, if your employer matches
50 cents for every dollar that you put in up to 5 percent of your pay.
You are getting a guaranteed 50 percent "return" on your contribution.
That is one of the only guaranteed returns in the world of investing.
If your employer doesn’t match your 401(k), don’t despair. You still
get tax advantages by contributing to your retirement account. Even if
your employer doesn't match your contribution, the government will still
subsidize a portion by giving you either a tax-deferral up front or a
tax-exemption down the road, depending on whether you use a Traditional or a Roth account respectively).
Create and maintain a strong budget
that guides where your dollars will go every month. It will help you
spend less than you earn, then you can invest the difference.
"I doubled my money." It's a badge of honor dragged out at cocktail
parties and a promise made by overzealous advisors. Perhaps it comes
from deep in our investor psychology – the risk-taking part of us that
loves the quick buck.
That said, doubling your money is a realistic goal that an investor
should always aim for. Broadly speaking, there are five ways to get
there. Which you choose depends largely on your appetite for risk and
your timeline for investing.
- The Classic Way
- The Contrarian Way
- The Safe Way
- The Speculative Way
- The Best Way
5 Ways to Double Your Investment
The Classic Way, or Earning It Slowly
Investors who have been around for a while will remember the classic
Smith Barney commercial from the 1980s in which British actor John
Houseman informs viewers in his unmistakable accent that "we make money
the old fashioned way – we earn it."
When it comes to the most traditional way of doubling your money, that commercial's not too far from reality.
The time-tested way to double your money over a reasonable amount of
time is to invest in a solid, non-speculative portfolio that's
diversified between blue-chip stocks and investment-grade bonds.
It won't double in a year, it almost surely will eventually, thanks to the old rule of 72.
The rule of 72 is a famous shortcut for calculating how long it will
take for an investment to double if its growth compounds. Just divide
your expected annual rate of return into 72. The result is the number of
years it will take to double your money.
Considering that large, blue-chip stocks have returned roughly 10%
annually over the last 100 years and investment grade bonds have
returned roughly 6% over the same period, a portfolio divided evenly
between the two should return about 8% a year. Dividing that expected
return into 72 indicates that this portfolio should double every nine
years. That's not too shabby when you consider that it will quadruple
after 18 years.
When dealing with low rates of return,
the rule of 72 is a fairly accurate predictor. This chart compares the
numbers given by the rule of 72 and the actual number of years it would
take these investments to double in value.
| Rate of Return | Rule of 72 | Actual # of Years | Difference (#) of Years |
| 2% | 36.0 | 35 | 1.0 |
| 3% | 24.0 | 23.45 | 0.6 |
| 5% | 14.4 | 14.21 | 0.2 |
| 7% | 10.3 | 10.24 | 0.0 |
| 9% | 8.0 | 8.04 | 0.0 |
| 12% | 6.0 | 6.12 | 0.1 |
| 25% | 2.9 | 3.11 | 0.2 |
| 50% | 1.4 | 1.71 | 0.3 |
| 72% | 1.0 | 1.28 | 0.3 |
| 100% | 0.7 | 1 | 0.3 |
Notice that, although it gives a quick and rough estimate, the rule of 72 gets less precise as rates of return become higher.
The Contrarian Way, or Blood in the Streets
Even the most unadventurous investor knows that there comes a time
when you must buy, not because everyone is getting in on a good thing
but because everyone is getting out.
Just as great athletes go through slumps when many fans turn their
backs, the stock prices of otherwise great companies occasionally go
through slumps, which accelerate as fickle investors bail out.
As Baron Rothschild once said, smart investors "buy when there is blood in the streets, even if the blood is their own."
Nobody is arguing that you should buy garbage stocks. The point is that there are times when good investments become oversold, which presents a buying opportunity for investors who have done their homework.
The classic barometers used to gauge whether a stock may be oversold are the company's price-to-earnings ratio and book value.
Both measures have well-established historical norms for both the broad
markets and for specific industries. When companies slip well below
these historical averages for superficial or systemic reasons, smart
investors smell an opportunity to double their money.
The Safe Way
Just as the fast lane and the slow lane on the highway eventually
will get you to the same place, there are quick and slow ways to double
your money. If you prefer to play it safe, bonds can be a less
hair-raising journey to the same destination.
Consider zero-coupon bonds, including classic U.S. savings bonds, for example.
For the uninitiated, zero-coupon bonds may sound intimidating. In
reality, they're simple to understand. Instead of purchasing a bond that
rewards you with a regular interest payment, you buy a bond at a
discount to its eventual value at maturity.
For example, instead of paying $1,000 for a $1,000 bond that pays
five percent per year, an investor might buy that same $1,000 bond for
$500. As it moves closer and closer to maturity, its value slowly climbs
until the bondholder is eventually repaid the face amount.
One hidden benefit is the absence of reinvestment risk. With standard
coupon bonds, there are the challenges and risks of reinvesting the
interest payments as they're received. With zero coupon bonds, there's
only one payoff, and it comes when the bond matures.
The Speculative Way
While slow and steady might work for some investors, others find
themselves falling asleep at the wheel. For these folks, the fastest
ways to super-size the nest egg may be the use of options, margin trading or penny stocks. All can super-shrink a nest egg just as quickly.
Stock options, such as simple puts and calls,
can be used to speculate on any company's stock. For many investors,
especially those who have their finger on the pulse of a specific
industry, options can turbo-charge a portfolio's performance.
Each stock option potentially represents 100 shares of stock. That
means a company's price might need to increase only a small percentage
for an investor to hit one out of the park.
Just be careful, and be sure to do your homework before trying it.
For those who don't want to learn the ins and outs of options but do
want to leverage their faith or doubts about a particular stock, there's
the option of buying on margin or selling a stock short.
Both of these methods allow investors to essentially borrow money
from a brokerage house to buy or sell more shares than they actually
have, which in turn raises their potential profits substantially.
This method is not for the faint-hearted. A margin call can back you into a corner, and short-selling can generate infinite losses.
Lastly, extreme bargain hunting can turn pennies into dollars. You can roll the dice on one the numerous former blue-chip companies that have sunk to less than a dollar. Or, you can sink some money into a company that looks like the next big thing.
Penny stocks can double your money in a single trading day. Just keep
in mind that the low prices of these stocks reflect the sentiment of
most investors.
If you decide to invest in stocks, consider using one of the best online stock brokers to keep your costs of investing low.
The Best Way
While it's not nearly as fun as watching your favorite stock on the
evening news, the undisputed heavyweight champ is an employer's matching
contribution in a 401(k) or another employer-sponsored retirement plan.
It's not sexy and it won't wow the neighbors at your next block
party, but getting an automatic 50 cents for every dollar you save is
tough to beat.
Making it even better is the fact that the money going into your plan
comes right off the top of what your employer reports to the IRS. For
most Americans, that means that each dollar invested costs them only 65
to 75 cents.
If you don't have access to a 401(k) plan, you still can invest in a
traditional IRA or a Roth IRA. You won't get a company match, but the
tax benefit alone is substantial.
A traditional IRA has the same immediate tax benefit as a 401(k). A
Roth IRA is taxed in the year the money is invested, but when it's
withdrawn at retirement no taxes are due on the principal or the
profits.
Either is a good deal for the tax-payer. But if you're young, think
about that Roth IRA. Zero taxes on your capital gains? That's an easy
way to get a higher effective return.
If your current income is low, the government will even effectively match some portion of your retirement savings. The Retirement Savings Contributions Credit reduces your tax bill by 10% to 50% of your contribution.
Be Wary
There's an old saying that if "something seems too good to be true,
then it probably is." No matter which of this strategies appeal to you,
it's sage advice when it comes to promises of doubling your money.
There are probably more investment scams out there than there are
sure things. Be suspicious whenever you're promised results. Whether
it's your broker, your brother-in-law or a late-night infomercial, take
the time to make sure that someone is not using you to double their money.
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