A Safe Approach To Doubling Your Money? More Than One Exists
Double your money on an investment? The phrase represents a holy grail for many. The challenge sounds especially daunting today when most “safe” investments are returning historically low returns. Bankrate, which tracks U.S. certificates of deposit, currently lists a 2.0% 5-year return on a $25,000 deposit.
According to investment author Ken Clark, doubling your money is still a realistic goal, but also one that can lure people to act impulsively. Clark, writing in Investopedia, presented five realistic strategies an investor can follow to double their money.
The Classic Approach
The classic approach is to earn gains slowly. An example is investing in a secure, non-speculative portfolio including investment grade bonds and blue chip stocks. This approach works on account of the “rule of 72,” referencing calculating how long it takes to double value based on compounded interest. Dividing the expected annual rate of return by 72 yields the number of years it takes to double the value.
Since blue chip stocks have gained about 10% over the past 100 years while investment grade bonds have gained about 6%, a portfolio split evenly among them will return about 8%. This means the value will quadruple in 18 years.
According to Stansberry Research, Warren Buffet turned $105,000 into more than $50 billion through compounding. He researched the best companies to invest in, then waited for their stock values to drop due to a scandal or a market collapse, then he bought.
‘Blood In The Streets’
The “blood in the streets” approach refers to instances when an investor feels they have to buy because everyone else is selling. This is also known as the “contrarian” approach. Stock prices of normally strong companies suffer slumps on occasion when fickle investors want to bolt.
Sir John Templeton and Baron Rothschild said smart investors buy when there’s “blood in the streets.” They were referring to the fact that good investments get oversold, presenting a buying opportunity for investors who know what they are doing.
The book value and price-to-earnings ratio offer barometers for determining when a stock is oversold. These metrics have established good historic norms in specific industries and broad markets. When companies fall below these historic averages for systemic reasons or superficial ones, an opportunity exists for investors to double their money.
The Safe Approach
Investors wary of risk find bonds a safe approach to growth. Zero-coupon bonds such as U.S. savings bonds can accomplish this goal. Such bonds are easy to comprehend. Rather than buying a bond paying regular interest, purchase one at a discount to its ultimate maturity amount.
Rather than paying $1,000 for a $1,000 bond paying 5% annually, buy it for $500. When it approaches maturity, its value rises until the holder is fully repaid the face amount.
There is no reinvestment risk in this approach. Standard coupon bonds carry the regular need to reinvest interest payments as they are received. Zero-coupon bonds do not incur the challenge of investing smaller rate payments or risking declining interest rates.
The Speculative Approach
For investors craving excitement and having an appetite for bigger risks, options, margin and penny stocks offer some of the fastest ways to double value.
Puts and calls enable one to speculate on the stock of any company. Investors who pay attention to specific industries are in a position to improve their portfolio’s performance using these stock options. Each stock option can represent 100 shares of stock, meaning a stock price could only have to rise a small percentage to return a big gain. This approach requires research, since options can suck wealth as fast as they can give it.
Those who want to leverage their faith in a stock but don’t have the patience to research options can sell a stock short or buy on margin. These techniques involve borrowing money from a brokerage house and purchasing more shares to boost potential profits. This technique takes guts since margin calls can corner one’s available cash while short selling can deliver infinite losses.
Bargain hunting is another technique that can boost returns. Whether one gambles on former blue chip companies selling at under one dollar or investing thousands of dollars into the next “big thing,” penny stocks can double in value in one day. A company’s stock price, whatever the amount, reflects what value other investors don’t see paying beyond.
The Best Approach Of All
The best way to doubling one’s investment pile is taking advantage of their employer’s matching contribution to their retirement plan. Receiving 50 cents on every dollar deposited is a sure way to build wealth.
Another important consideration is the fact that the money going into a 401(k) is tax deductible. This means every dollar invested costs the investor only 65 to 75 cents. For every 75 cents, investors receive $1.50 or more in their retirement fund.
For those who don’t have an employer-sponsored 401(k) plan and earn less than a certain amount, the federal government matches a portion of contributions to retirement accounts. The Credit for Qualified Savings Contribution cuts the tax of the contribution by 10% to 50%.
Do Your Homework
Doubling one’s money is a realistic goal, but investors need to be frugal. There are more scams promising unrealistic returns than safe bets.
This article gives an overview of a subject that is very serious to most people and deserving of significant consideration. In a free market society, the individual bears responsibility for their own wealth creation. Those who are serious need to allocate time to research investment options.
Since most individuals do not have the time to devote to extensive investment research, financial advisers are important. Finding the right advisor, however, requires research in itself.
Kiplinger.com, a long-time investor research firm, recently released an article on selecting an investment advisor. Following are some tips.
1) Learn financial professional vocabulary. Know the difference between an SEC registered investment adviser, a registered representative and an insurance agent. Know if the adviser’s compensation is fee-based or commission-based.
2) Be aware of all fees associated with investments. The fee-based adviser arrangement is a preferred method since it incentivizes ongoing planning. But it is important to be aware of investments held in a fee-base account since these are fees on top of the fee paid to the adviser.
3) Be aware of an adviser firm’s revenue sharing arrangements with mutual funds and annuity products. These arrangements can cloud an adviser’s advice. Big financial companies often have revenue sharing documents disclosing their conflicts of interest.
4) Be aware of an adviser’s affiliations. Some companies that seem independent are actually franchises of larger companies and therefore have the same conflicts of interest as larger companies.
The relationship an investor establishes with an adviser has to be based on trust to be mutually beneficial. The client in this relationship should feel comfortable asking the advisor any question they wish.
While it is not unreasonable for the advisor to feel frustrated at times working with a client, a good advisor wants the client to feel confident in their investment decisions.