"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|
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.
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.