Turning $200,000 into $800,000

(Money Magazine) -- Question: I have $200,000 invested today that I would like to grow to $800,000 over the next 24 years. What return do I need to earn on my investments for that to happen? -- Nancy, Quincy, Mass.

Answer: On the theoretical level, the answer to your question involves nothing more than some simple math. The kind of gain you're shooting for requires a 6% annualized return, assuming you'll reinvest your gains each year and that those gains will also earn 6% a year.

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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Of course, to earn 6% annualized you don't have to actually get 6% year in and year out. You could earn more in some years and less in others.

So, for brevity's sake, to use an example over a three-year span, earning 10% one year, -2% the following year and 10.5% the next year would also work.

But while this is all fine in theory, in the real world you're still left with the issue of actually getting 6% annualized on your two hundred grand over 24 years.

Given the current low level of interest rates, I don't know of any investment around that will deliver that return guaranteed for 24 years. Investments that offer guaranteed returns -- CDs, Treasury securities held until maturity and such -- aren't paying anywhere near enough.

So as a practical matter, if you want a realistic shot at turning your $200,000 into $800,000 by the year 2034, you're going to have to put your dough in a diversified portfolio of investments, such as a combination of stock and bond mutual funds.

The key word here is "potential." When you invest in stocks and bonds, you may do spectacularly well some years (a 50-50 mix of equities and bonds earned 17.4% in 2009), fare poorly in others (the same blend lost 16.4% in 2008) and get so-so returns in yet other years (4.3% in 2005).

The point is that the return you will earn is uncertain. (In fact, recent research suggests that stock returns in particular may be even more prone to ups and downs than investors previously thought.)

So you really need to be thinking in terms of the probabilities of having a various amounts of money in the future. To get a sense of those probabilities -- and how they change if you invest more aggressively or more conservatively -- you can go to Morningstar's Asset Allocator tool.

So, for example, if you go to the tool and plug in the amount you have ($200,000), your goal ($800,000), the number of years in which you want to reach that goal (24) and then use the slider to create a simple portfolio of 50% large-company stocks and 50% bonds, you'll see that the tool estimates you have a 21% chance of achieving your goal in 24 years.

It also shows that you may do a lot better if the financial markets perform well. For example, you have a 10% chance of having almost $1 million or more.

You'll find that you can significantly increase your odds of reaching your goal by investing more aggressively. For example, the odds of having $800,000 in 24 years jump to 31% if you invest 70% in stocks and 30% in bonds, and your upside also climbs significantly. There's a 10% chance that you'll have at least $1.3 million.

But there's also a risk that comes with investing more heavily in stocks. Your portfolio will experience more volatility and uncertainty. So while the tool estimates that a 50-50 portfolio has a possible three-month loss of roughly 8%, it figures a 70-30 portfolio could drop more like 11% over the same period.

There's also a potential long-term price to investing more aggressively. For example, the tool projects that even if the financial markets do very poorly over the next 24 years, with a 50-50 portfolio you have a 90% chance that your $200,000 will grow to at least $312,000. If the markets turn against you and you've invested in a portfolio of 70% stocks and 30% bonds, on the other hand, you have a 90% chance of having as little as $290,000.

In short, the higher volatility of returns that's inherent in a more aggressive, stock-intensive portfolio gives you a shot at higher rewards if things work out well, but leaves you with considerably less if markets deteriorate badly.

I don't want to suggest that by going to this calculator you'll be able to know with pinpoint accuracy your odds of reaching your goal. All these figures are based on projections, and projections are squishy by their nature.

How you do in the real world will also depend on the investments you choose. Again, no guarantees here, but I think you can tilt the odds in your favor by sticking to low-cost investor-friendly funds like those that appear on our MONEY 70 list of recommended funds.

That said, I think there's a value to going through the sort of exercise I just described. I've limited my examples to mixes of large company stocks and bonds. But you can use the tool's sliders to create portfolios with different combinations of large, small-mid and foreign stocks, bonds and cash. You can also very easily extend or shorten your investing time period and periodically invest new money to your portfolio if you wish.

By doing this, you'll come away with a better sense of how the investment world works. You'll see in actual numbers that the higher the returns you shoot for, the more volatility you must accept. More important, you'll see that while investing more aggressively may lead to greater rewards, it can also lead to much more meager ones if things go wrong.

Bottom line: whether you're investing for a goal like retirement that's decades away or something shorter-term, incorporate uncertainty and volatility into your planning.

Allow for the very real possibility -- indeed, the likelihood -- that you won't get exactly the return you're shooting for. Consider you may end up with something less. And then build in a cushion by saving more or giving yourself more time to reach a goal. Better yet, do both.