Doubling your money is considered a badge of honour, and it is frequently mentioned as a source of pride at celebrations and around the Thanksgiving dinner table. Overzealous advisors, or even worse, scammers and fraudsters, might make false promises to investors, promising to quadruple their money. Perhaps the desire to double one’s money stems from a deep-seated aspect of our investor psychology—the risk-taking side of us that thrives on making a fast payday. However, the consideration of two key aspects that are intertwined in achieving this goal must be considered: time and risk. In this context, time horizon and risk tolerance refer to both you and your investment and the features of the investment itself, such as the amount of time it may take for the investment to double, which is based on the riskiness of the investment.
Critical Factors to Consider: Time Horizon and Risk Appetite
Your age and investment objectives mainly determine your investing time horizon. It is essential to consider your investing time horizon when determining the amount of investment risk you are comfortable with. For example, a young professional with a long investment horizon is likely to tolerate a substantial level of risk because time is on their side when it comes to recovering from any losses. But what if they’re saving for a down payment on a property within the year? As a result, they will have a low-risk tolerance because they cannot afford to lose a large amount of money in a quick market correction, which would threaten their primary investment goal of purchasing a home.
In the same way, the conventional investing strategy suggests that people approaching or in retirement should have their funds invested in “safe” assets such as bonds and bank deposits; however, in an era of very low-interest rates, that strategy carries its risks, the most significant of which is the fall in purchasing power as a result of inflation. Furthermore, a retired individual in their 60s with a good pension and no mortgage or other debts would most likely have a good risk tolerance given their age and circumstances.
Let us now consider the “time and risk” characteristics of an investment in and of itself. Investing in something that has the potential to double your money in a year or two is unquestionably more thrilling than investing in something that may double your money in 20 years. Here’s the rub: an exciting, high-growth investment will be significantly more volatile than a steady type of investment. The more the volatility of an investment, the greater the risk associated. A greater degree of volatility or risk is the price an investor must bear in exchange for the enticement of more significant profits.
How long does it take for one’s money to double in value?
According to the Rule of 72, the investment will take 72 years to double in value if its growth is compounded yearly. Calculate your projected annual rate of return by multiplying 72 by your expected annual rate of return. The outcome is the number of years it will take for your money to double, expressed as a percentage.
When dealing with poor rates of return, the Rule of 72 provides a somewhat accurate estimate of the time it will take for the investment to double. However, when the rate of return is extremely high, the accuracy of the Rule of 72’s estimates of “time to double” (in years) decreases, as illustrated in the chart below, which compares the estimates of “time to double” (in years) generated by the Rule of 72 with the actual number of years required to double an investment.
How to Double Your Money in Five Simple Steps
Doubling your money is an achievable objective that many investors strive for, and it is not as intimidating a thought as it may appear to novice investors when they first begin investing. There are a couple of cautions, though:
When it comes to risk tolerance, be completely honest with yourself (and your investment advisor, if you have one). Discovering that you don’t have the stomach for volatility when the market plunges 20% is the worst time to discover this. It could be hazardous to your financial well-being.
You should avoid allowing the two emotions that drive the majority of investors—greed and fear—to hurt your investment selections.
Keep a close eye out for get-rich-quick schemes that offer you “guaranteed” sky-high returns with no risk. There is nothing such as a guaranteed return with minimal risk. Given that there are almost certainly many more investing scams than there are sure bets, you should be cautious if you are promised returns that seem too good to be true. It would help if you took the time to ensure that you are not being used to double someone else’s money, whether it’s your broker, your brother-in-law, or a late-night informational commercial.
What is the most effective method of doubling your money?
It all comes down to your risk tolerance, investment time horizon, and personal tastes, among other factors. Most people find success with a balanced approach that includes investing in a diversified mix of equities and bonds. The more adventurous may opt to dabble in more speculative investments such as small-cap stocks or crypto, while others may prefer to double their money by making real estate investments, which are both risky.
Is it possible for an investor to employ all five methods in the quest to double one’s money?
Yes, without a doubt. If you are eligible, take advantage of any matching contributions your company makes to your retirement plan. If you want to profit from market fluctuations, invest in a diversified portfolio of stocks and bonds and consider becoming a contrarian when the market falls or rises dramatically. To add some sizzle to your steak, commit a small amount of your portfolio to more aggressive methods and investments if you have the risk appetite to do so (after conducting research and due diligence, of course). Keep a regular savings account to purchase a home, and place the down payment in a savings account or other reasonably risk-free investment.