In sports terms it's the grand slam (or hat trick, or triple-double) of the investing world. That is to say, doubling your money isn't entirely unheard of, but it is relatively rare.
Except, doubling a portfolio's value isn't nearly as unusual or difficult as some investors feel it is. It happens all the time, in fact. The trick is simply being patient, being smart, and keeping things simple rather than complicated. Investors aiming for the stars need to follow these four simple rules to complete the feat.
Image source: Getty Images.
1. Let time do most of the work
The advice isn't surprising to anyone, but is being given here all the same -- give your stocks time to do what stocks eventually do: That is, go up.
Admittedly, it's easier said than done. When an account's value is stagnating for a little too long, we'll typically swap out recently poor performers with a more storied pick. All too often, though, the timing of those trades is exactly wrong. A red-hot stock is bought right as it's topping out, and a go-nowhere name is sold right before it resumes its forward progress. Usually the smartest move to make is simply leaving your portfolio alone. Things will eventually work to your advantage.
But how long must investors stand pat to double their money? Using the rule of 72 (that is, the number 72 divided by a portfolio's average annual rate of return equals the number of years required to double its value), a more aggressive collection of growth equities producing an average annual return of 12% will be twice as big as its starting value within six years. A safer, more conservative mix averaging a return closer to 8% a year should double in value within nine years.
Both paces are impressive, but in both cases investors must think in terms of years rather than months.
2. Mix it up, and then rebalance
A portfolio shouldn't consist solely of growth stocks or solely of value stocks, however. For that matter, most portfolios shouldn't exclusively be stocks at all. Bonds and commodities often perform well when all stocks lag, and vice versa, and there are going to be years when you earn (or could earn) more through dividends than you will through capital appreciation.
There are two common mistakes investors frequently make with their diversification efforts, though.
One of them is reinvesting dividends in the stock paying those dividends at the time the dividend is paid. There's nothing wrong with collecting dividend payments in cash and then using that cash to establish a position in an entirely new name at an opportune entry point.
The other common diversification misstep is failing to rebalance a portfolio once a target mix of growth versus value, stocks versus bonds, and small-caps versus large-caps has become completely out of whack. These seemingly small nickels and dimes add up over time.
Be careful of scheduling or automating these rebalancing transactions. There's a good deal of empirical evidence confirming that this approach not only fails to enhance returns, but may even harm them. Rather, use common sense and good judgment to identify overextended names among your holdings, selling them at the time their risk outweighs their reward. Use those proceeds to beef up underrepresented portions of your portfolio when a good buying opportunity is taking shape.
3. Think small (but be smart)
Speaking of market caps, although most of us will mostly own large-caps because these companies are most familiar to us, there's upside in looking at lesser-known names within the small-cap segment of the market.
Case(s) in point: Over the course of the past year, shares of small caps Sunworks, Kirkland's, and software outfit Veritone are all up more than 1000%, trouncing the returns of the biggest gains of even the market's largest large-caps, including Tesla's heroic advance. The only exception to this disparity is the 1585% return Plug Power shares have dished out over the past 52 weeks, although it's worth noting that a year ago, Plug Power was a small-cap.
Don't lose perspective. For every Facebook or Microsoft around now, there are oodles of companies that folded or fell into bankruptcy. Small-caps and even micro-caps still boast better long-term returns than large-caps do, however, even if they've lagged the past ten years.
Wilshire US Micro-Cap Price Index data by YCharts
If you're willing to do some serious homework, the right small-cap picks can really rev up your returns.
4. Contribute to your matched 401(k) if you have one
Finally, it's not as exciting as reaping gains from making great stock picks, but your employer may offer a retirement plan that matches a big piece of your personal contribution.
For many investors, these free-money opportunities will come in the form of 401(k) plans. The most anyone can put into these particular retirement accounts in 2021 is $19,500 of their own money, although investors over the age of 50 can make a "catch up" contribution of an additional $6500. The contribution caps are considerably higher when employers are also making a contribution on your behalf, though. Between your own money and theirs, a deposit up to a limit of $58,000 to (or up to $64,500 if you're 50 or older) can be put into a tax-deferring 401(k) on your behalf in 2021.
Granted, most employers don't chip in anywhere near this amount. Many will match your contribution on a dollar-for-dollar basis up to a relatively generous figure, however, effectively doubling a big chunk of your retirement savings for any given year.
