Double Up! - Get Rich Quick or Nought
Have you ever heard the phrase ‘if it sounds too good to be true it probably is?’ Wise words, and certainly true when it comes to promises of making fast money investing. Doubling your money, and making fast cash is always going to be a tempting offer, and it’s easy to see why many people are keen to start dipping their toes into investing.
While I’m a firm advocate of investing smartly, and tales about teenage investors making a killing are quite awe inspiring to read, getting things quite right is a little more complicated. Of course it’s possible to double your money in a short time, but, the quicker the time frame to double your cash, the bigger the risk you’re going to face.
To even push this observation further, a quick search on google to “Double your money” generated a billion results! Where as a search for “Long Term Investing” returned half that.
Thank you MoneyNotes for the explanation, I’m ready to focus on true wealth generation but I’m still curious as to how long these wealth generating instruments can lead to my money doubling. Fine, let’s explore a couple of these investments using the rule of 72.
For each investment, ask what the expected return would be over the long term. Then 72 divided by the expected return gives you an estimate of how long it will take to double your money. We set out a few examples below.
These are also called shares or stocks. The basic idea is that your money is invested in a business and you have some ownership of this business and hopefully participate in growth of the business both in terms of value and profit sharing (called dividends)
Suggested way to invest - Through funds which are a collection of shares. You could then buy several units of this fund.
Expected return - We expect return of about 6% a year after allowing for fees. This is our estimate and some like our friends at The Motley Fool may be more optimistic than we are.
Double up time - Applying rule of 72, 72 divided by 6 equals 12. Therefore it will take 12 years on average to double up.
MoneyNotes Says - This is why we advocate starting to invest early. Investing in a JISA for your child from when they are born to when they finish university could provide opportunity for the money to double up twice if invested solely in equities
Property could also be accessed through a fund where you can invest in commercial propeties such as offices, warehouse etc., or you could feel more comfortable with a buy-to-let of your own if you have the capital for deposit and other transaction costs.
Expected return - we expect returns of 4.5% per year over the long term
Double up time - Applying rule of 72, 72 divided by 4.5 equals 16. Therefore it will take 16 years on average to double up
MoneyNotes Says - Some would argue about this and say that house prices, especially in London must have doubled in the last 10 years and not 16 years. Perhaps this is the case but you have to remember that we are talking about averages here and there are scenarios and time periods were the doubling up is faster or slower than 16 years
This is money you loan to the government and they are expected to pay you interest (coupon) and then the original loan amount back after a certain period. The risk is that the government may not be able to pay back i.e. they default. This rarely happens in western world.
Expected return - For bonds this normally depends on how long you have loaned the money for. For example return for a 10 year government bond in UK is about 1.6% a year at the moment
Double up time - Applying rule of 72, 72 divided by 1.6 equals 45. Therefore it will take 45 years on average to double up
MoneyNotes Says - Some may be put off by the time it takes to double up here. However it is worth noting that In most cases, the longer it takes to double up, the safer the investments so if you are really cautious or can’t afford to have the value of your investment swing around too much then bonds with a shorter maturity (i.e., shorter time to get your original investment back) would be ideal
Bringing it all together
Now that we have an idea of double up time for different asset classes, their expected returns and a sense for how risky they are, a portfolio could be built to allocate a proportion of your wealth to Equities, Bonds and Property. This asset allocation is one of the single most important aspect of investing and we highly recommend Asset Allocation for Dummies to help you further your financial education on investments.