Here's a secret. Doubling your money in the stock market isn't difficult. In fact, even if you had bought shares of an S&P 500 index fund at the worst possible point in the past 20 years -- in 2007 just before the financial crisis hit -- you would have nearly tripled your money in the years since.
Having said that, if your goal is to double your money in the stock market, there are some best practices to follow, as well as some blunders to avoid. With that in mind, here are three "tricks" to keep in mind that will put you in the best position to double your money and much more in the years to come.
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Avoid speculation
Here's one big mistake newer investors often make. It may seem like investing in risky stocks with the highest growth potential or speculating on stock options is the best way to get rich in the stock market. And while these methods have the highest possible returns, the most likely outcome isn't making a bundle of money - it's the exact opposite.
The best course of action is to learn some of the basics of how to use value investing and growth investing principles the right way. To make a long story short, you should aim to buy rock-solid companies with long-tailed growth potential. And if you don't want to do the homework involved with choosing individual stocks, there's nothing wrong with buying index funds. You might be surprised at the returns that have been made over the years with seemingly boring investments like Coca-Cola (KO 0.05%), American Express (AXP 0.58%), and Johnson & Johnson (JNJ -0.39%) – even the Vanguard S&P 500 ETF (VOO 0.53%) index fund has delivered 287% total returns over the past decade .
Don't over-trade
Over the past 20 years (through 2019), the S&P 500 has generated annualized returns of just over 6%. Meanwhile, the average equity fund investor has achieved returns of just 4.3% per year, according to Dalbar's latest Quantitative Analysis of Investor Behavior (QAIB). This is the difference in turning a $100,000 investment portfolio into about $230,000 or $322,000 over those two decades.
Some of this difference has to do with investment fees, but the biggest reason for the difference is over-trading. Humans are emotional beings. When stocks are soaring, we see everyone else making money and push all of our chips into the middle. Conversely, when the stock market is crashing, it's human nature to want to "get out before things get worse." It is common knowledge that the central goal of investing is to buy low and sell high. But our instincts compel us to do the exact opposite.
The point is that trying to time the market when it comes to buying or selling is a losing battle. There are certainly some good reasons to sell, and I sell stocks every so often. But buying or selling stocks simply based on what the overall stock market is doing isn't a winning long-term strategy. If you're worried the market is too expensive, dollar-cost averaging is a strategy to try. And if the market is crashing, think of it as a good time to add shares of excellent companies for the long term.
Be patient
It's certainly possible to double your money in the stock market over short periods of time. Just ask anyone who has invested in big tech stocks over the past few years. And if it happens, great. But don't swing for the fences in an attempt to get rich quickly.
The hands-down best way to build wealth in the stock market is to invest in great companies and hold onto them for as long as they remain great companies. Don't sell stocks just because their price went up or down. And approach every investment as if you were buying a business, not a stock. You wouldn't start or buy a business to run for a few days or weeks and then cash out, right? The same logic should apply to your stock investments.
No extraordinary measures needed
As billionaire investor Warren Buffett has said, you don't have to do extraordinary things to get extraordinary results. And Buffett has built a fortune of nearly $100 billion without speculating on risky investments, without constantly buying or selling stocks, and by simply letting the power of time do the heavy lifting. By keeping these three things in mind as you go about your investing career, you may not build a billion-dollar portfolio, but you can certainly multiply your investment dollars several times over.
Matthew Frankel, CFP owns shares of American Express. The Motley Fool owns shares of Vanguard S&P 500 ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
FAQs
Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.
What is the doubling money trick? ›
Just divide 72 by your expected annual rate of return. The result is the number of years that it will take to double your money. When dealing with low rates of return, the Rule of 72 provides a fairly accurate estimate of doubling time.
How to turn 100k into 1 million? ›
If you keep saving, you can get there even faster. If you invest just $500 per month into the fund on top of the initial $100,000, you'll get there in less than 20 years on average. Adding $1,000 per month will get you to $1 million within 17 years. There are a lot of great S&P 500 index funds.
How to turn 200k into 1 million? ›
How to Turn a $200,000 Investment Into $1 Million
- Evaluate Your Starting Point. Putting together $200,000 to invest is no small feat. ...
- Estimate Your Risk Tolerance. Your risk tolerance will determine what investments you're comfortable making. ...
- Calculate Necessary Returns. ...
- Allocate Investments Wisely. ...
- Minimize Taxes and Fees.
What is the Rule of 69? The Rule of 69 is used to estimate the amount of time it will take for an investment to double, assuming continuously compounded interest. The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result.
What is the rule of 69 in investing? ›
It's used to calculate the doubling time or growth rate of investment or business metrics. This helps accountants to predict how long it will take for a value to double. The rule of 69 is simple: divide 69 by the growth rate percentage. It will then tell you how many periods it'll take for the value to double.
What is the magic number to double your money? ›
Here's how the Rule of 72 works. You take the number 72 and divide it by the investment's projected annual return. The result is the number of years, approximately, it'll take for your money to double.
How to double $10,000 fast? ›
Here are some ways to flip $10,000 fast:
- Flip items (buy low, sell high)
- Start a blog.
- Start an online business.
- Write an email newsletter.
- Create online courses or teach online.
- Invest in real estate with EquityMultiple.
To turn $5,000 into more money, explore various investment avenues like the stock market, real estate or a high-yield savings account for lower-risk growth. Investing in a small business or startup could also provide significant returns if the business is successful.
How much will 100K be worth in 30 years? ›
Answer and Explanation: The amount of $100,000 will grow to $432,194.24 after 30 years at a 5% annual return. The amount of $100,000 will grow to $1,006,265.69 after 30 years at an 8% annual return.
The simplest path from $100,000 to $1 million
The simplest way to invest your money is by using a simple broad-market index fund. An index fund that tracks the S&P 500 or a total stock market index typically has low fees, and it's going to closely match what the overall stock market returns.
How to invest $100K at 70 years old? ›
Consider these options to grow $100,000 for retirement:
- Invest in stocks and stock funds.
- Consider indexed annuities.
- Leverage T-bills, bonds and savings accounts.
- Take advantage of 401(k) and IRA catch-up provisions.
- Extend your retirement age.
Americans looking to stretch their retirement savings may want to head to states in the South or the Midwest, a recent analysis suggests. Around the U.S., a $1 million nest egg can cover an average of 18.9 years worth of living expenses, GoBankingRates found.
How to make 200k passive income? ›
If you have at least $200,000 to invest for passive income, here are some of the smartest ways to do it.
- Dividend stocks. ...
- Index Funds. ...
- Rental Properties. ...
- Real Estate Investment Trusts (REITs) ...
- Real Estate Crowdfunding. ...
- Fixed-Income Securities. ...
- Peer-to-Peer Lending. ...
- Art and Fine Wine Investments.
Summary. $2 million is far above the average retirement savings in the US. $2 million should afford you to enjoy a comfortable and happy retirement. If you choose to retire at 50, a retirement savings fund of $2 million would provide you with $50,000 annually.
What is the Rule of 72 in simple terms? ›
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
What is the Rule of 72 in trading? ›
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
Does the Rule of 72 really work? ›
How the Rule of 72 Works. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.107.3 = 2). The Rule of 72 is reasonably accurate for low rates of return.
How many years are needed to double a $100 investment using the Rule of 72? ›
To find out how many years it would take for a $100 investment to double at this interest rate, we divide 72 by 6.25. 72 ÷ 6.25 = 11.52 Therefore, it would take approximately 11.52 years for a $100 investment to double when the interest rate is 6.25 percent per year.
