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Recent share market improvements, both locally and offshore over the past 3 months has seen many investors seeking a quick way to “double their money” in the investment markets Alas this short term scenario is more akin to gambling or pure speculation than to serious low risk long term investing that we advocate at Hudson Financial Planning.
However what is a prudent time frame to consider an achievable goal of doubling your money?
Well it all comes back to compounding returns and investing in an asset that allows you to let the wonder that is “compound interest” to work it’s magic over time to help you achieve the desired goal
A simple, yet time honoured tool to assist in this calculation is the old “Rule of 72” formula.
This simple tool allows you to divide the expected return on offer for the investment into 72 and the number that is achieved is in effect (roughly) how many “periods of time” it will take for the asset value to double in value. It is not exact but accurate enough for the desired result.
As an example take an asset that is expected to return 10 % per year. If we divided 72 by 10(%) it will take (72/10) = 7.2 years for the asset to double in value.
Now that seems easy but the hard part is finding an asset that will consistently return the desired amount that fits with the predicted time frame. Property returns are not this predictable and accurate and neither are shares which are very volatile over the short term but great over the longer term.
The asset class to consider could be fixed interest investments as they can be locked in for a set time frame.
Lets say that given the low interest rate and low inflation rate world we live in you wish to double you money in 15 years.
Using the rule of 72 methodology this equates to approximately a 4.8% per annum return. Can you get this return in fixed interest markets? Well in term deposit it would be all but impossible from traditional banks as interest rates are at multi decade lows and time frames longer than 5 years are hard to come by.
What you may well be forced to consider is fixed interest securities issued by major corporates that pay a fixed coupon until expiry.
There are a number of such securities around presently that are returning in excess of 4.8% but they usually come in minimum parcels of $100K and are issued by various corporates on a range of credit ratings.
This may not suit all investors as you are taking on board the risk attributes of the issuers
Also the investment must have the ability to allow you to reinvest the interest return each year to take advantage of the wonders of compound interest.
The issue then comes down to the amount of capital you have. Minimum amounts of $100,000 to devote to fixed interest investments will preclude many investors – although some Self Managed Super funds may fit the bill.
So is this the way to go ?
A set return of over 4.8% allowing you to double your money in 15 years appears attractive in today’s low interest rate environment and uncertain investment world but this return does not take into account taxation implications nor inflation.
With taxation the ownership of the asset will determine the tax rate And as for inflation you need to remember that whilst your capital may well have doubled what does this mean practically when you use to it buy other things ?
Has your purchasing power kept in line with inflation or have you fallen behind where you need to be and would other “growth” assets have given you a better longer term return albeit with much more volatility.