Welcome back, Motley Fools! It's May, and you know what that means: Once again, it's time to reveal for you a couple of (new, but time-tested) investing tricks to double your money.
Last time around, we discussed using the rule of 72 to plump up your portfolio, and also took a quick tour 'round the incredible world of dividend investing. Today, we're going to move right ahead to consider the merits of buying into a market crash ... and then take a refresher course in the miracle of compound interest.
Without further ado...
Buy into a market crash
Coronavirus is all anyone seems to be talking about these days, so let's start off by talking a little bit about coronavirus -- and the gigantic market crash it has caused.
From peak to trough, the stock market crash that started in late February and ended (we hope?) in late March subtracted about 35% from the value of the S&P 500. Now ... how much do you think the S&P 500 would have to "go back up" in order to return to where it started?
Here's a hint: The answer is a lot more than "35%."
In fact, to go from 3,370 (where the market traded around about Feb. 21) to 2,192 (where it bounced on March 22) and back again will require the S&P 500 to eventually book a 54% gain off its March 22 price.
Now here's the thing: A lot of stocks fell more than 35% in that crash. Some fell as much as 50%. For any one of these stocks, getting back to "even" at the Feb. 21 price would require a 100% gain in stock price. In other words, someone who bought at the peak and sold at the trough would lose 50% of their money. But someone who bought at the trough and rode the stock back to its peak would "double their money."
"Interesting!" you say. "But isn't this just an academic discussion? Stocks have already bounced back, so doesn't that mean it's now too late to double your money?"
Not necessarily. As it turns out, at this very moment there are still a total of 671 stocks that are trading at 50% -- or less -- of what they cost at the beginning of this year. And yes, some of these 671 are stocks with serious trouble baked into their business plans, which may never bounce back -- companies like Aurora Cannabis (NYSE:ACB) that are carrying crushing debt loads and trying to sell their product into an oversupplied market. But you can also find major, blue chip brand names like Alcoa (NYSE:AA), Schlumberger (NYSE:SLB), and American Airlines (NASDAQ:AAL) selling for 50% discounts (and more) today.
Now granted, these companies, too, have their issues. Alcoa is heading into a recession with a $1 billion net debt load, and according to data from S&P Global Market Intelligence, it has resumed burning cash in the face of coronavirus. Schlumberger's debt burden is even bigger -- like $13.3 billion in net debt, and the $7.4 billion net loss it just reported isn't going to make things any easier for it in the short term. And American -- well, we all know how the airline industry is struggling these days. Less than three years after American CEO Doug Parker made his famous, and famously ill-advised, prediction that American isn't "ever going to lose money again," the company did just that -- and, in fact, lost $2.2 billion in the first quarter.
Regardless, unless you think that after coronavirus passes, the world will have no further need for aluminum, oil, or air travel, chances are good these companies still will be around to profit from the eventual rebound. While I cannot guarantee that any one of these stocks will return to their former glory, if and when they do, the brave investors who buy their stocks today should have a good chance to double their money ... and maybe even make a little bit more.
The miracle of compound interest
Now ... how about we look at a way to increase your chance of doubling your money even more?
Assume you start out with $5,000 to invest in the stock market. Now assume that you can scrimp and save, and manage to tuck away just $25 extra every month, and add that to your investments.
How long do you think it would take you to double your initial investment, and have a whopping $10,000 investment to your name?
Simple math probably tells you that 5,000 divided by 25 equals 200 -- 200 months, or nearly 17 years, to double your money, right? Well, what if I told you that you're much more likely to hit your $10,000 goal in just five years?
The "investing trick" that makes this happen is what Albert Einstein called "one of the most powerful forces in the universe" -- the miracle of compound interest.
Every day that your initial $5,000 is invested in the market, it's more and more likely to grow at the stock market's average annual rate of 10%. Every time you add $25 to your initial investment, you goose that growth rate a bit. But you also give the "compounding miracle" a bit more money to work with. Those $25s start growing right alongside your initial $5,000!
And so it is that, if you start with $5,000, add $25 monthly, and allow all of that money -- both old and new -- to grow steadily, then five short years of earning 10% annual returns should make you the proud owner of $10,162.47 "in the bank."
It's amazing, yes, and it's also true -- and here's the government website to prove it.