Can a Mutual Fund Double Every 10 Years?
A review of long-term stock market results shows that on a historical basis, it has definitely been possible for a mutual fund to double in value every 10 years. If the market can repeat its historical averages, some mutual funds will produce those types of returns in the future. However, the path will be uneven, involving some periods of great returns and other times when your funds are flat or losing value.
Return Needed to Double
The math rule of 72 tells you how long it will take to double your money at a given rate. The interest rate times the number of years to double compounded equals 72. So to double an investment in 10 years, divide 72 by 10. A mutual fund needs an average annual return of 7.2 percent to double in 10 years.
Average Stock Market Returns
Over the long term, bonds have not produced the 7 percent plus returns to get those decade doubles. However, the Dow Jones industrial average produced an average annual return of 10.4 percent per year during the 20th century. And from 1950 through 2009, the broader market S&P 500 stock index produced an 11 percent average yearly return. So historically, stocks have performed well enough to double an investment every 10 years, and a stock mutual fund could produce similar returns.
Stock Returns are Not Consistent
Although the stock market and stock mutual funds are the investment choice for doubling your investment every 10 years, it is important to understand that stock market returns are not consistent. In the six decades from 1950 through 2009, the annual average return per decade ranged from a negative 1 percent for 2000 through 2009, to an average of 19.3 percent per year in the 1950s. In more recent history, the market averaged more than 17 percent annually in the 1980s and 1990s, after results of less than 6 percent per year in the 1970s.
Reinvest Dividends and Capital Gains
Your mutual fund results will depend on a combination of how the overall stock market performs and how well the fund manager picks stocks. An index stock fund will match the selected stock index if you do not want to pick from the large number of actively managed funds to try to find a winner. An important factor in your mutual fund returns is to make sure you reinvest all dividends and capital gains back into more shares of the fund. The reinvested distributions will help compound the investment results and help you reach your financial goals.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.