NEW YORK (CNN/Money) -
If I were to invest $3,600 today with you as my investment planner, how long would it take to double my money? And how would you invest it to assure it would actually double given today's economic climate?
-- Lisa, Fallston, Maryland
Sorry, Lisa, but I don't think I want the job as your investment planner. You want definitive answers to questions that I don't feel anyone can honestly answer definitively.
Oh sure, I can tell you all about the Rule of 72, which says that if you divide the number 72 by an investment's annual rate of return, you will get the number of years it will take the investment to double in value (leaving out the effect of taxes, of course).
So, for example, if you stash your $3,600 in an investment that returns an annualized 6 percent, your $3,600 will turn into $7,200 in 12 years (72 divided by six). And if you put your $3,600 in an investment that earns an annualized return of 12 percent, your $3,600 will be worth $7,200 in just six years (72 divided by 12).
Problem is, though, I'm not much good at predicting the rate of return an investment is going to earn, and I don't believe others are much better at it either.
There's data, but what is it worth?
That's not to say there isn't scads of data about the average rates of return various types of investments have achieved in the past.
For example, Ibbotson Associates' annual yearbook regularly calculates the annualized rates of returns for stocks, bonds and Treasury bills from 1926. And according to the 2003 yearbook, which gives returns through the end of 2002, the compound annual return for large-company stocks over the past 77 years was 10.7 percent, compared with 5.3 percent for intermediate-term government bonds and 3.8 percent for Treasury bills.
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But applying those past averages to the future can be tricky. Why? Because they're averages, and investment returns tend to fluctuate a lot over shorter spans.
Take the return for large-company stocks. Back during the '90s boom, large-cap stocks were churning out gains well above their long-term average. For the five years through 1999, for example, big stocks returned an annualized 28.6 percent, which means at that rate an investment in large-company stocks would double in about two and a half years.
But if you had invested on the assumption you would earn that rate of return going forward, you would have been sorely disappointed. Large-company stocks declined 9.1 percent in 2000, then another 11.9 percent in 2001 and yet another 22.1 percent in 2002, bringing the five-year annualized return for the five years through 2002 to a negative 0.6 percent.
Take a more balanced approach
Rather than spend your time trying to predict how long it will take various investments to double your money -- or getting some investment planner to do it -- I recommend that you put your effort into creating a portfolio that reflects your appetite for risk and the length of time you plan to keep your money invested.
The key to doing that is to spread your money around to a variety of investments, as we recommend in our Asset Allocation tool. This approach may not provide you with the kind of precision you seem to desire. But it's certainly a better approach than futile guesses about how long it will take specific investments to double your money.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.
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