If someone tells you that you can double your money in one, five or 10 years, you should exercise extreme skepticism. No one can guarantee that type of return for you, or give you real, useful advice that allows you to double your money so quickly risk-free. It can happen, but to double your money you need to earn high returns, and to earn high returns you need to take on substantial . This means you can lose your money. In order to safely double your money, your first step should be to set realistic goals with respect to your time frame and your risk tolerance. It is more important that you actually manage to double your money, as opposed to doubling your money quickly, because how quickly you do it is arbitrary and meaningless, particularly if you end up it all.
The Rule of 72
The "rule of 72" is a simple way to estimate how long it takes to double your initial investment given a specific rate of return, which is assumed to . Compounding returns means that annual returns are reinvested along with your initial investment, so that they contribute to a higher total rate of return over a given time period. The rule of 72 states that the time it takes to double your money is calculated by dividing the number 72 by the expected rate of return. Rates of return are expressed as a percentage, like 10 percent. To apply the rule of 72, use a whole number instead of a percentage. For example, for a rate of return of 10 percent, you would divide 72 by 10, resulting in 7.2. This means that if you expect an annual rate of return of 10 percent, it would take 7.2 years to double your money.
If you invest in one stock or bond, it is extremely difficult to predict what your ultimate return will be. As you diversify by investing in other securities, you lower your total risk. But remember, risk does not refer to the risk of losing your money. Risk refers to the probability that actual returns vary from predicted returns. Therefore, diversifying reduces risk, but also reduces the chances of earning outsize returns (such as returns that would double your money almost immediately). A number of entities, such as financial information company Ibbotson Associates, Inc., have been tracking historical stock and bond returns going back to 1926, and have generally found that the best way to influence your ROI is by investing in a particular asset class for a long period of time. Long means a minimum of seven to 10 years. According to the data, stocks outperform bonds in the longterm by approximately 6 percent per year. Smaller stocks outperform larger stocks - this is known as the small stock premium. Again, investors demand compensation for assuming greater risk, and investments in smaller stocks are riskier than larger company stocks.
Assuming that annual long-term stock returns average approximately 10 percent, this implies that you can double your money in just over 7.2 years, based on the rule of 72, if you invest all of your funds in a portfolio of large company stocks. If small company stocks earn 14 percent per year (it depends on how small the companies are), you can double your money in roughly 5.5 years.
There are other assets classes that earn high returns, including venture capital and certain real estate sectors, but these are very difficult for individuals to invest in, and generally include very high management fees.
It is critical to invest in ways that minimize transaction and management costs, because these, including taxes, can eat away at your investment returns. Avoid having your investment portfolio actively managed by an investment advisor; this is expensive. Also avoid high-fee mutual funds, particularly Class C mutual fund shares, which often incorporate front-end fees of approximately 5 percent. Exchange-traded funds are low-cost, easy to trade investment vehicles that are available to individual investors. They offer a wide selection of investments, including that focus on large company stocks, small company stocks, or various mixes.