Dubai: Doubling your wealth has evidently proven to have less to do with your job title and more to do with what you do with the money you have.
However, a question that often resurfaces is whether investing is the only way to double your money and if it is, isn’t investing putting your hard-earned income at significant risk of losing it?
Not all ways are realistic
While doubling your money is a realistic goal that most salary-earners and businessmen always aim for, and while there are many ways to get there, these methods don’t often increase your wealth or purchasing power even a little bit.
Investing to double your money can be done safely over several years, or quickly, although there’s more of a risk of losing most or all of your money for those that are impatient.
While many agree that a better strategy is to put your cash in the stock market – if you are planning on doing that, you can rely on simple concepts to double its actual, spendable value. Whatever be the means you opt for, it all depends largely on your appetite for risk and your timeline for investing.
It's not that hard to double your money, if you have enough time. Even with a small investment growth rate, you can double your money over many years. When it comes to stocks, even one growing at 4 per cent annually will more than double over 20 years. But many seek quicker means to double their money.
Is investing the only way?
When it comes to the traditional way of doubling your money, it’s time-tested 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 (of large companies) and good-grade (as rated by credit agencies) bonds.
It won't double in a year, but it should, eventually, given the rule of 72. The rule of 72 is a shortcut for calculating how long it will take for an investment to double if its growth compounds. Just divide 72 by your expected annual rate. The result is the number of years it will take to double your money.
Considering that large, blue-chip stocks have returned roughly 10 per cent annually over the last 100 years and investment-worthy bonds have returned roughly 4 per cent over the same period, a portfolio divided evenly between the two should return about 8 per cent a year.
Dividing 72 by that expected return rate indicates that this portfolio should double every nine years. That's not too shabby when you consider that it will quadruple after 18 years.
Knowing how long will it take
The time it takes to double your money in the stock market is a function of your portfolio's average annual growth rate. If you know the growth rate, you can approximate your doubling time by dividing that rate into 72. The answer is your estimated doubling time in years.
Follow this math with the cash in your savings account, and you'll quickly see the advantage of stock market investing. A good interest rate on cash today is about 0.5 per cent. At that rate of growth, your cash balance will double in 144 years.
Compare this to money invested in an index fund, which you could reasonably expect to grow at about 7 per cent a-year. Now you're doubling your money in less than 11 years -- a far more useful timeline.
Note the doubling time unfolds from the investment's future growth rate, which will be a guess on your part. The guess is an educated one when you're basing it on historic market averages.
However, your doubling time estimates will be far less reliable if you're assuming an investment will grow at 10 per cent or 15 per cent annually. This is because positions that outperform the market are usually less consistent.
You might see 15 per cent growth one year and 4 per cent growth the next, for example. It's not a single year of growth that matters; it's the average over time.
How to handle a volatile stock market
Stock market volatility has often irked investors, especially newbies. But it also creates opportunity for those who have the grit to buy when everyone else is selling.
That same day, you could have purchased the popular US-based Vanguard's S&P 500 ETF (Exchange-Traded Fund) for about $210 (Dh771) per share.
As of early February 2021, this ETF is trading at over $350 (Dh1,285) per share. It hasn't quite doubled yet, but it has grown 66 per cent in less than one year.
How do I raise money I don't have?
While you shouldn’t interpret this to mean you should refinance your property to raise money for the next stock market crash. Buying during a down cycle is not an easy or quick way to make some cash.
You have to manage two levels of uncertainty. First, in the moment, you don't know when the market has hit bottom. You could buy today and see your investment lose 20 per cent of its value the very next day.
Secondly, you don't know how long the recovery will take. It could be months, as happened in 2020, or it could be years, as with the 2009 crash.
To manage that uncertainty, focus on high-quality investment positions that can survive whatever circumstances are causing the market to falter. Also only invest money you don't need for at least five years, so you're not caught off guard by a drawn-out recovery.
Planning for the bad times is just as important
While building wealth is one thing, holding onto it is another game altogether. While veteran stock market investors never leave the latter up to chance, they instead proactively plan for the worst, and look for ways to protect their existing income.
Some of the most common disaster-proof strategies is having a cash emergency fund equal to six months of income, researching and choosing the right health insurance plan, protecting their income with disability insurance, their family with life insurance or their legacy with an estate plan.