There's something about the idea of doubling one's money on an investment that intrigues most investors. It's a badge of honor dragged out at cocktail parties, a promise made by over-zealous advisors, and a headline that frequents the covers of some of the most popular personal finance magazines. Perhaps it comes from deep in our investor psychology - the risk-taking part of us that loves the quick buck.
Here we look at the right and wrong ways to invest for big returns. Investors who have been around for a while will remember the classic Smith Barney commercial from the s, where British actor John Houseman informs viewers in his unmistakable accent that they "make money the old fashioned way - they earn it.
Perhaps the most 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. While that portfolio won't double in a year, it almost surely will eventually, thanks to the old rule of The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds on itself.
According to the rule of 72, you divide your expected annual rate of return into 72 , and that tells you how many years it will take to double your money. That's not too shabby when you consider that it will quadruple after 18 years. Even straight-laced, even-keeled investors know 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 like great athletes go through slumps when many fans turn their backs, the stock prices of otherwise great companies occasionally go through slumps because fickle investors head for the hills.
As Baron Rothschild and Sir John Templeton once said, smart investors " buy when there is blood in the streets , even if the blood is their own. Rather, they are arguing that there are times when good investments become oversold , which presents a buying opportunity for brave investors who have done their homework.
Perhaps the most classic barometers used to gauge when a stock may be oversold is the price-to-earnings ratio and the book value for a company. Both of these measures have fairly 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 will smell an opportunity to double their money. Just like how the fast lane and the slow lane on the freeway eventually lead to the same place, there are both quick and slow ways to double your money. So for those investors who are afraid of wrapping their portfolio around a telephone pole, bonds may provide a significantly less precarious journey to the same destination.
But investors taking less risk by using bonds don't have to give up their dreams of one day proudly bragging about doubling their money. In fact, zero-coupon bonds including classic U. For the uninitiated, zero-coupon bonds may sound intimidating. In reality, they're surprisingly 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 maturity amount.
As it moves closer and closer to maturity, its value slowly climbs until the bondholder is eventually repaid the face amount. One hidden benefit that many zero-coupon bondholders love is the absence of reinvestment risk.
With standard coupon bonds, there's the ongoing challenge of reinvesting the interest payments when they're received. With zero coupon bonds, which simply grow toward maturity, there's no hassle of trying to invest smaller interest rate payments or risk of falling interest rates.
While slow and steady might work for some investors, others may find themselves falling asleep at the wheel. They crave more excitement in their portfolios and are willing to take bigger risks to earn bigger payoffs. For these folks, the fastest ways to super-size the nest egg may be the use of options, margin or penny stocks. 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 their portfolio's performance. Considering that each stock option potentially represents shares of stock, a company's price might only need to increase a small percentage for an investor to hit one out of the park.
Be careful and be sure to do your homework; options can take away wealth just as quickly as they create it. For those who want don't want to learn the ins and outs of options but do want to leverage their faith or doubt about a certain 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 can raise their potential profits substantially.
This method is not for the faint-hearted because margin calls can back your available cash into a corner, and short-selling can theoretically generate infinite losses. Lastly, extreme bargain hunting can quickly turn your pennies into dollars.
Whether you decide to roll the dice on the numerous former blue-chip companies that are now selling for less than a dollar, or you sink a few thousand dollars into the next big thing, penny stocks can double your money in a single trading day. Just remember, whether a company is selling for a dollar or a few pennies, its price reflects the fact that other investors don't see any value in paying more.
While it's not nearly as fun as watching your favorite stock on the evening news, the undisputed heavyweight champ of doubling your money is that matching contribution you receive in your employer's 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 deposit is tough to beat.
Making it even better is the fact that the money going into your k or other employer-sponsored retirement plan comes right off the top of what your employer reports to the IRS. For most Americans, that means that each dollar invested really only costs them 65 to 75 cents out of their pockets. Before you start complaining about how your employer doesn't have a k or how your company has cut their contribution because of the economy, don't forget that the government also "matches" some portion of the retirement contributions of taxpayers earning less than a certain amount.
There's an old saying that if "something is too good to be true, then it probably is. While there certainly are other ways to approach doubling your money than the ones mentioned so far, always be suspicious when 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. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. The Classic Way - Earn It Slowly Investors who have been around for a while will remember the classic Smith Barney commercial from the s, where British actor John Houseman informs viewers in his unmistakable accent that they "make money the old fashioned way - they earn it.
The Contrarian Way - Blood in the Streets Even straight-laced, even-keeled investors know 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.
The Safe Way Just like how the fast lane and the slow lane on the freeway eventually lead to the same place, there are both quick and slow ways to double your money. The Speculative Way While slow and steady might work for some investors, others may find themselves falling asleep at the wheel.
The Best Way to Double Your Money While it's not nearly as fun as watching your favorite stock on the evening news, the undisputed heavyweight champ of doubling your money is that matching contribution you receive in your employer's retirement plan. The Bottom Line There's an old saying that if "something is too good to be true, then it probably is. How much a fixed asset is worth at the end of its lease, or at the end of its useful life.
If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded. Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage.
The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money. Get Free Newsletters Newsletters.More...