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.
A look-back at an investment lesson learnt same time last year
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.
What analysts recommend buying to double your money
Here are three company stocks that could potentially double your money, if you decide to invest a part of your savings to buy them in the days to come.
Shares of US-based image sharing and social media service Pinterest surged more than 250 per cent in 2020, and is recommended by most analysts covering the stock as a definite buy because the stock has an incredibly high price-to-earnings (P/E) ratio of 200.
What’s does a high P/E ratio mean, and what do they average at?
The average P/E for the top 500 US stocks on the globally-tracked benchmark S&P 500 has historically ranged from 13 to 15. For example, a company with a current P/E of 25, above the S&P average, trades at 25 times earnings.
Although the price of Pinterest may not double in the near future, but analysts are widely of the opinion that it’s long-term future appears quite promising.
In Pinterest’s last quarter, its revenue surged 76 per cent year over year, with net profit soaring nearly 700 per cent. While you can’t expect such growth rates to continue for long, the company does project a 70 per cent year-over-year growth rate for revenue in the coming first quarter.
• NIO Inc.
Major automakers like Ford and Volvo are racing to roll out more electric vehicles (EVs) as they try to catch Tesla. China-based EV maker NIO is a rising star, as its sales steadily grows. The company is also focused on autonomous driving tech, as well as batteries, which are the lifeblood of the industry.
NIO sells multiple models that are somewhat in-line with Tesla, from smaller SUVs to sedans. The company said in early January that it delivered 17,353 vehicles in the fourth quarter, which marked a 110 per cent jump.
Analysts estimate NIO’s 2020 revenue to jump 120 per cent to $2.49 billion (Dh9.2 billion), with 2021 projected to come in another 97 per cent higher. The Chinese EV company is also expected to significantly shrink its adjusted losses during this stretch.
• Wix.com Inc.
Israel-based software company and cloud-based web development services provider Wix.com has had a stellar year so far in the stock market. The company is known for its easy to use website builder and offers a variety of customisation for its websites.
Wix is also one of the tech companies that benefited from the COVID-19 pandemic. The company has enjoyed a year-to-date increase of 36 per cent and traded at $344.12 (Dh 1,263) per share.
From its latest quarterly report, revenue came in 38 per cent higher year over year to $282.5 million (Dh1 billion). The company added 185,000 net premium subscriptions in the fourth quarter. That brought its total subscriber count to 5.5 million as of the end of 2020.
Wix’s total registered user base, meanwhile, climbed 19 per cent to 196.7 million. As Wix continues to pivot its technology to address the e-commerce space, analysts recommend that the growth trajectory for WIX stock is far from over.
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.