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There is a rule in investing and portfolio management that every investor should learn on day 1: Rule 72.
If you make an average 3% return annually in the stock market, doubling your money takes about 24 years. You get the 24 years by dividing 72 by 3%. The 3% return is the average annual return of retail investors like you and me, according to many studies that have calculated the average return of retail investors over several decades. Ouch! 3%, 24 years!
But 24 years is too long! How can you double your money faster than the other individual investors? Today, I will share three ways to double your portfolio FASTER than the market average.
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of our educational series to help you hone your fundamental investing skills. Catch up with the other post on How to Invest Like Buffett? or how to Find the Highest-Returning Stocks?
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Let's talk about three ways you can double your money faster. Before we even start the video, I give you one strategy you can adopt today and reduce your time to double the money from 24 years to 7. Invest all of your money in the S&P500 Index ETF, ticker SPY. This ETF has returned an average of 10% in the last 30 years. 72 divided by 10 is about 7 years.
But if 7 years is still too long, watch the rest of the post. Logically, you need to generate higher returns to double your investment faster. That's simple to understand. If you generate higher returns, you'll move faster.
But how do you increase your rate of return without gambling? That's the question. I can take my $100 to Vegas tomorrow, put it on the blackjack table, and try to double it in 5 minutes. Many investors try to achieve such returns by investing in crazy, highly volatile stocks, IPOs, and things like that. Those are possible ways to go about it, but they require lady luck to be with you, and many of us don't have the stomach to put our portfolio at risk and in the hands of the game of chance.
We want to discuss logical and practical ways we can implement quickly to double our portfolios faster. I've found three strategies we can follow to achieve that goal, and implementing each strategy doesn't take too long, and anyone, even beginners, can do it. You adjust your portfolio once and sit back to see the results.
I ordered the strategies from the most to the least common approaches. So, as we talk about the strategies, it gets more interesting.
The first strategy: Invest more frequently
Investing as soon as possible and frequently as possible is one of the best ways to double your portfolio faster. This is because investing sooner gives you more time in the market, and investing more frequently allows you to take advantage of the market's downtrend and lower prices, resulting in higher returns in the same time period.
Most people don't do that because they want to find the lowest market prices. It's logical, but in practice, it's almost impossible to figure out when the prices are at their lowest in the stock market.
If you invest frequently without trying to find the so-called market bottom, inevitably, you'll catch the market's bottom and invest at the lowest prices.
I've seen this in our users' portfolios on Stock Card. In an attempt to find the market bottom, most investors wait too long, and the market goes back up before they take any action.
Here's a real example. Let's say, 2 years ago, in September 2021, when the market got too expensive, you decided to monitor the S&P500 ETF price with the aim of finding the market's bottom. In fact, many of our users on Stock Card have stopped researching new stocks and ETFs about that time, and when we asked why, they said they were waiting for the bottom.
If you were one of them, you could have waited until April 2022, and the price would have dropped by 10%. This could have been the bottom, and you could have invested your money. The problem is that even though the market went up slightly after that, had you waited a few more months, by September 2022, the ETF's price was down another 13%. In reality, none of us can predict the exact bottom, and in an attempt to find the bottom, we either jump in too soon or stay away too long, missing the market's best days by waiting for a bigger drop.
Instead, you would have been in a much better position had you invested your $100 slowly and a small amount every month between then and now and caught the market bottom automatically by the nature of your frequent investments. This strategy is called dollar cost averaging and results in a smoother, less volatile, effortless strategy that can also improve your rate of return, especially if you are one of those investors who tend to stay away from the market far too long. Because of its effortlessness, it's ideal for beginner investors, too.
The second strategy: Take more calculated risks
Another way to double your portfolio faster is to take more risks but calculated ones. This means investing in assets that have the potential to generate higher returns, even if they come with more risk. But the risk is calculated, and you still manage your risk by eliminating easy-to-see sources of risk.
Rule 72 tells us that if our return is 10%, we need about 7 years to double our money. A 10% return is what most investors expect from investing in low-risk, broad market indices before any fees and costs based on historical data.
What if we get a 1% higher? 72 divided by 11% equals 6.5 years required to double our money. How about a 15% annual return? The time to double our money is cut to 4.5 years.
Which assets have a higher annualized return than the broad market index ETF? Riskier assets such as small-cap stocks or international emerging countries and specific high-growth sectors such as biotech or technology can give you a higher return than the market's average 10%.
For example, Vanguard S&P Small-Cap 600 ETF, ticker VIOO, has had roughly 12% annualized return since its inception over 13 years ago vs. the 9.94% annualized return of S&P 500 ETF, ticker SPY. Similarly, VanEck Biotech ETF, ticker BBH, has had a 14.33% annualized return since its inception 12 years ago.
The problem with these investments is that they are also more volatile. Looking at their recent performance, many small-cap or specialized ETFs have underperformed the overall market recently. You can easily get caught up in a down cycle, and your return gets even smaller than the market index in the short term.
But what did we discuss in Strategy One just a minute ago? Invest slowly and frequently as the prices go down, resulting in higher overall returns. These strategies are all interconnected.
The third strategy: Develop EMOTIONAL control
Improving your emotional control is typically advice from your school counselor or marriage therapist. I'm not either of those. But controlling your fear and anger in response to the market's ups and downs is the most important skill you can develop, allowing you to double your money faster.
Let's talk about a very practical example. We all know the rule number of one of investing. Buy LOW, Sell HIGH. Look at your own behavior now. How many investments have you made in the last 12 months when the market is relatively lower than the all-time highs of the COVID rally in 2020 and 2021? BE honest! Were you buying things when they were high, hoping to sell higher? And have you stopped investing now because you are scared the prices are down? What happened to the old wisdom of Buy Low, Sell High?
Looking at the retail investors' trading volume when the stock market goes down confirms that we all make the mistake of doing precisely the opposite of buying LOW and selling HIGH. During COVID's market rally, retail investors' trade volume was going up, and as soon as the market got a bit cheaper, the volume died down.
Fear of losing more money and being scared when the market is down is a natural human reaction. But it's the enemy of your portfolio.
Peter Lynch puts it the best:
"In Investing Your Stomach Is More Important Than Your Brain"
In the $100 example I gave earlier, we discussed how investing slowly and steadily instead of trying to find the bottom can improve your return. In the same example, if you could control your emotions and invest MORE whenever the stock market drops by 10% or more, let's say in April 2021 and June 2022, you could have increased your investment return significantly. The more the market is down, buy more. This is NOT to say that you must wait for a market dip. This means you can increase your return if you increase your investment when the market is down, contrary to the emotional reaction our brains may have in such situations.
Dan Ariely, professor of Behavioral Economics at Duke University, gives one practical exercise that can help you strengthen your emotional control in investing. He advises investors to invest looking forward and assume they have no portfolio:
Make investment decisions regardless of what happened to your portfolio. This means don't look at your portfolio when you want to invest. Don't ask yourself what I do now that my portfolio is down 20%. Assume you have no portfolio so the anger and pain of losing money don't cloud your judgment. Do your research looking forward, not based on what you have lost.
Today, we discussed three ways you can double your portfolio faster:
I'll see you next time!