Actor Will Rogers said, "The quickest way to double your money is to fold it in half and put it in your back pocket." Unfortunately, that folded dollar bill is still only worth $1 -- which is no help when you're trying to build wealth. A better strategy is to invest in the stock market to turn that $1 into $2, and then $2 into $4. Here are two tricks to help you do just that.
1. Wait for it
Waiting is a tried-and-true method for doubling your money in the stock market. That may not sound strategic or even interesting, but it always works. You can even predict how long that doubling will take with a simple calculation known as the Rule of 72. To use the Rule of 72, simply divide 72 by the annual growth rate. The answer is the number of years it will take to double your money.
You can easily apply the Rule of 72 to your various financial accounts to gage how fast they'll double in value. For example:
- Your savings account balance earning 1.5% annually will double in 48 years, or 72 divided by 1.5.
- Your 401(k) balance earning 7% annually will double in 10.3 years, or 72 divided by 7.
- Your taxable brokerage account that's earning 5.5% annually after taxes will double in about 13 years, or 72 divided by 5.5.
The Rule of 72 boils the complexities of compound interest into a nearly accurate formula that anyone can use. Master it, and you can estimate doubling times, but you can also use the formula to understand what it takes to reach your financial goals.
Say you need $1.5 million on hand to fund your dream retirement 30 years from now in 2050. You expect to earn 7.2% annually in your retirement account, which means your balance will double every 10 years. At that rate, you can double your wealth three times in 30 years. Working backward from 2050, you can figure out what you'd need today to reach that $1.5 million goal:
- You need $750,000 on hand by 2040, so it can double to $1.5 million by 2050.
- You need $375,000 on hand by 2030, so it can double to $750,000 by 2040.
- You need $187,500 on hand by 2020, so it can double to $375,000 by 2030.
Note that this doubling happens without extra contributions from you -- it's purely on the strength of compound earnings at that 7.2% growth rate over time. Add contributions continually or achieve a higher rate of return and the doubling will happen faster. If you pull money from the account or earn a lower rate of return, the doubling will take longer.
2. Buy when everyone else sells
If you play around with the Rule of 72, you'll quickly realize that you can expedite the doubling of your money by increasing your rate of return. There are various ways to increase your returns and they all come with some level of added risk.
One strategy that's applicable to 2020 is the practice of buying when everyone else is selling. Should the market fall into another tailspin later this year, or anytime really, increase your investing activity while share prices are down. Doing so pads your share count and pushes down your average cost per share. As a result, you'll have larger gains when the eventual recovery happens.
The risk of buying after a crash is that you have no idea how long a recovery could take. It could be days, weeks, months, or years. And if the factors that caused the crash also fundamentally change the long-term outlook for the positions you're buying, you may not see those big recovery gains ever. If you're uncertain about how specific companies will perform going forward, keep your post-crash buys focused on broader market, large-cap index funds.
Use time to your advantage
There isn't much mystery to doubling your money in the stock market. It's simply a function of your growth rate and time.
Since growth rates are the wild card in that equation, use time to your advantage by investing today and regularly going forward. As your balance grows, you'll see that doubling momentum in action. It's not as easy as folding a dollar bill, but it's far more profitable.