When an investment vehicle offers a high rate of return in a short period of time, investors know this means the investment is risky.
Given enough time, many investments have the potential to double the initial principal amount, but many investors are instead attracted to the lure of high yields in short periods of time despite the possibility of unattractive losses.
Make no mistake, there is no guaranteed way to double your money with any investment. But there are plenty of examples of investments that doubled or more in a short period of time. For every one of these, there are hundreds that have failed, so the onus is on buyer to beware.
The Rule of 72
This is definitely not a short term strategy, but it is tried and true. The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double ((1.10^7.3 = 2). If you have the time, the magic of compound interest and the Rule of 72 is the surest way to double your money.
Options offer high rewards for investors trying to time the market. An investor who purchases options may purchase a stock or commodity equity at a specified price within a future date range. If the price of a security turns out to be not as desirable during the future dates as the investor originally predicted, the investor does not have to purchase or sell the option security.
This form of investment is especially risky because it places time requirements on the purchase or sale of securities. Professional investors often discourage the practice of timing the market and this is why options can be dangerous or rewarding. If you want to learn more about how options work, read our tutorial or sign up for our Options for Beginners course on the Investopedia Academy.
Initial Public Offerings
Some initial public offerings (IPOs), such as Snapchat's in mid-2017, attract a lot of attention that can skew valuations and the judgments professionals offer on short-term returns. Other IPOs are less high-profile and can offer investors a chance to purchase shares while a company is severely undervalued, leading to high short- and long-term returns once a correction in the valuation of the company occurs. Most IPOs fail to generate significant returns, or any returns at all, such as the case with SNAP. On the other hand, Twilio Inc.(TWLO), a cloud communications company that went public in June of 2016, raised $150 million at an IPO offer price of $15 a share. In its third day of trading, Twilio was up 90 percent and by mid-December was up 101 percent.
IPOs are risky because despite the efforts make by the company to disclose information to the public to obtain the green light on the IPO by the SEC, there is still a high degree of uncertainty as to whether a company's management will perform the necessary duties to propel the company forward.
The future of startups seeking investment from venture capitalists is particularly unstable and uncertain. Many startups fail, but a few gems are able to offer high-demand products and services that the public wants and needs. Even if a startup's product is desirable, poor management, poor marketing efforts and even a bad location can deter the success of a new company.
Part of the risk of venture capital is the low transparency in management's perceived ability to carry out the necessary functions to support the business. Many startups are fueled by great ideas by people who are not business-minded. Venture capital investors need to do additional research to securely assess the viability of a brand new company. Venture capital investments usually have very high minimums, which can be a challenge for some investors. If you are considering putting your money into a venture capital fund or investment, make sure to do your due diligence.
Foreign Emerging Markets
A country experiencing a growing economy can be an ideal investment opportunity. Investors can buy government bonds, stocks or sectors with that country experiencing hyper-growth, or ETFs that represent a growing sector of stocks. Such was the case as with China from 2010-2018. Spurts in economic growth in countries are rare events that, though risky, can provide investors a slew of brand new companies to invest in to bolster personal portfolios.
The greatest risk of emerging markets is that the period of extreme growth may last for a shorter amount of time than investors estimate, leading to discouraging performance. The political environment in countries experiencing economic booms can change suddenly and modify the economy that previously supported growth and innovation.
Real estate investment trusts (REITs) offer investors high dividends in exchange for tax breaks from the government. The trusts invest in pools of commercial or residential real estate.
Due to the underlying interest in real estate ventures, REITs are prone to swings based on developments in an overall economy, levels of interest rates and the current state of the real estate market, which is known to flourish or experience depression. The highly fluctuating nature of the real estate market causes REITs to be risky investments.
Although the potential dividends from REITs can be high, there is also pronounced risk on the initial principal investment. REITs that offer the highest dividends of 10% to 15% are also at times the riskiest.
High Yield Bonds
Whether issued by a foreign government or high-debt company, high yield bonds can offer investors outrageous returns in exchange for the potential loss of principal. These instruments can be particularly attractive when compared to the current bonds offered by a government in a low-interest rate environment.
Investors should be aware that a high yield bond offering 15 to 20% may be junk and the initial consideration that multiple instances of reinvestment will double a principal should be tested against the potential for a total loss of investment dollars. However, not all high yield bonds fail, and this is why these bonds can potentially be lucrative.
Currency trading and investing may be best left to the professionals, as quick-paced changes in exchange rates offer a high-risk environment to sentimental traders and investors.
Those investors who can handle the added pressures of currency trading should seek out the patterns of specific currencies before investing to curtail added risks. Currency markets are linked to one another and it is a common practice to short one currency while going long on another to protect investments from additional losses. Currency, or forex trading, as it is called, is not for beginners. If you want to learn more, check out our tutorial or take our Forex for Beginners course on the Investopedia Academy.
Trading on the forex market does not have the same margin requirements as the traditional stock market, which can be additionally risky for investors looking to further enhance gains.
While in some cases these investment choices can provide lucrative returns, they are marred by different types of risks. While risk may be relative, the listed investments require a combination of experience, risk management, and education.