How risky are you with your money? If you are not risky at all then you are definitely losing money. When you aren’t investing your money I can guarantee you that you are losing money. If you invest your money carelessly then I can guarantee you that you will lose it too. Lets have a look at 7 ways to double your money or lose it.
There are many things that you can do with your hard earned salary. You can spend it on something or you can just keep it safe. If you are a saver you can save it. Investors will tell you to invest it. In between those options there are hundreds of other options available to you.
To keep the exercise simple lets assume that you have R10 000 available on 1 Jan 2011. Then lets consider 7 options available to you and see which ones will let you double or lose your money over a 10 year period. The 7 options that we will consider are
- Spending the money
- Keeping it under your bed
- Putting it in a savings account
- Saving it in a high interest money market account
- Buying bonds
- Invest in equity ETF
- Buy company shares
All of the options covered below have been explained in detail in my earlier posts on understanding investments.
1. Spend the money
For most people exchanging money for a material item seems like good value for money. What if you spend that R10 000 on clothes or a cool new phone you will get the use of those items for a few years. But after 10 years you won’t even remember what you bought with that R10k. You could also use that money for a half payment on a R20K iphone and finance the rest. If you do this you will lose even more R5 857 to be exact. That what the interest will cost for you to borrow the extra R10K for that fancy phone
Does this option double your money or lose your money? Clearly this is the worst option as you just lose money. Spending on non essential items is a luxury full stop.
2. Keep the money under your bed
If you don’t spend the money you won’t double it but you won’t lose your money either. Right? Well maybe not. Not trusting anyone else with your money and having it ready in case you need it is a safe and cautious approach. This approach is a 100% guarantee that you have R10 000 in 10 years time. The problem is that it is costing you.
The reason is that money devalues over time due to inflation. Everybody knows that prices keep going up, that is inflation. So if you keep your money under your bed than in 10 years time you will still have R10 000. Problem is that the R10 000 will only buy you half of what you used to buy 10 years ago. That is because at an inflation rate of 7% your money will have halved in value. To understand better check out this financial literacy post.
Does this option double your money or lose it? It appears as if you don’t lose your money but actually you do.
3. Put the money into a savings account
Your bank will tell you to keep the money with them in a savings account because you can earn 3% interest. Sometimes they will tell you to keep it in a fixed deposit account or some other special savings account to earn more interest. When it comes to ways to double or lose your money this does seem like a good way to make more money.
If you put your R10 000 into this savings account and earn 3% interest you will have R13 349 in 10 years time. That is a 34% increase. It sounds fantastic. Problem is that you still have inflation at 7% so actually you have still lost money. That R10 000 should be around R20 000 just to be able to buy the same stuff. So you have actually lost around R 6000.
So although you have the guarantee that you get your R10 000 back plus a bit more. You are still losing out because you do not double your money.
4. Save the money in a money market fund
A money market fund is a type of investment designed to maintain the value of your money. It sounds like a fancy name but it is really just a type of unit trust. The aim is to beat a normal savings account and pay higher interest rate than inflation.
So if we said that inflation was at 7% then you would expect your R10 000 to grow by inflation at least so you will end up with just under R20 000 in 10 years time. That is quite good considering that the risk of losing your money is minimal over those 10 years.
When you think about how to double your money then this looks good. But you have just stood still in buying power terms.
5. Buying bonds
You could invest in a bond. Bonds are investments that are effectively loans with a fixed or variable interest rate. Buy buying a bond you are lending your money. You are guaranteed a return payment of your money plus the interest earned over that period. Bonds will pay you the highest interest rate possible and almost always more than inflation.
Bonds are issued by governments and companies so they are realiable assets. But they do depend on these guys being able to pay back their loans when they are due. If they default you will have a problem. So they are not guranteed but the risk of loss is minimal.
A bond rate of 10% is easily possible with inflation at 7%. That difference could even be more if the inflation rate dropped. That means that your R10 000 would become R26 000 in 10 years time. That would do more than preserve your R10 000. It will allow you to buy more.
Finally you have grown your money instead of preserving or losing it. So you have done more than double your money.
6. Invest in equity ETF
What happens if you invest in an equity exchange-traded fund (ETF)? This is a popular option for many long term investors because it is simple and low cost. But can you double your money or will you lose it?
ETFs are funds that track stock market indexes so they are made up of many different stocks or equities. They are not all the same and some are more risky than others. Lets assume that you invest in a broad index tracked fund like Satrix 40 ETF. This is made up of shares from the top 40 companies on the Johannesburg Stock Exchange.
The 10 year return for this period is around 9-13%. That is quite a bit higher than inflation and interest rates. Your R10 000 would be worth R23 330 to R33 143 over 10 years. That is more than double your money. Now we are talking real gowth and wealth creation.
The only catch is that it is not guaranteed but it is still dam close. The longer you invest the better the guarantee. But if you cash out at the wrong time you could lose out. But worst case you shouldn’t lose everything. If you balance risk and reward then this option is about the best bet you can make to double your money.
7. Buy company shares
The seventh option to double your money or lose it is to buy company shares. This is by far the best way to double your money. But there is also a very real possibility that you could lose it if you don’t know how to choose good stocks.
Lets have a look at the returns of some stocks over the last 10 years. If you had invested R10 000 in the following stocks on 1 Jan 2011 they would be worth this on 31 Dec 2020.
|Stock Name||Value of R10k invested for 10 years 2011-2020||Annual Return|
|Amazon||R 175 801||33%|
|Capitec||R 133 884||30%|
|Purple Group (Easy Equities)||R 36 900||14%|
|Vanguard FTSE All-World UCITS||R 33 143||13%|
|Satrix 40 ETF (JSE Top 40)||R 23 330||9%|
|Woolworths||R 22 264||8%|
|City Lodge||R 5 854||-5%|
|Sasol||R 5 463||-6%|
If you were lucky enough to buy Amazon back then you would have realised this 33% annual compound growth. Interestingly the previous 10 years the growth rate was only 11% which is good but it trippled in the next 10 years. Closer to home Capitec would have done a lot more than double your money it would have grown by 13 times.
However if you had bought Sasol you would have lost half your money rather than double your money. Looking at the previous 10 year cycle 2000 – 2010 Sasol had an annual return of 24% and you would have 8x your money.
It is clear that buying stocks is the best way to double your money. The problem is that it is far from guaranteed and is very risky. The chance of you choosing a bad stock is just as good as the chance of investing in a good stock.
I have included two index tracking ETFs just to give the perspective. They are sitting right in the middle of the returns.
The Best Way to Double Your Money
The first step is to avoid spending your money on unnecessary stuff.
It may seem difficult to decide what to do with your money. But one thing is guaranteed and that is that if you do nothing you are still making a choice. That choice of doing nothing is one of the worst choices. You have to put your money to work to make sure that it grows into the future.
Keeping the money in the bank or a savings account is better but you are still losing out over the long term.
Picking the right stocks is difficult and reality is that you will choose some good ones and some bad ones. Very very few investors manage to choose only the good ones on a consistent basis.
That is why my preference is to choose an index tracking fund. Of all the options it provides a good balance of risk and reward. But I have to admit the temptation of finding stocks that can more than double your money is very tempting.