When in a meeting recently, I was explaining to a client a quick way to think about varying rates of return – the Rule of 72. The client wasn’t familiar with it – so I thought a few of you may also wish to learn more about this simple but effective formula.
It’s called the Rule of 72 as you start with that number.
The rule is as follows :
72 divided by your given rate of return = the number of years it will take for your money to double.
How about an example?
There is a lot of attention being given to the 2 year US treasury interest rate right now. It’s significant for many reasons and certainly has implications for both the equity and bond market. However, if you were to invest at a rate of 4% (the approximate rate of that instrument right now), it would take 18 years for your money to double (72/4= 18)
What is you were able to reach an 8% rate of return (using perhaps a combination of bonds and equities)? Your money would double in 9 years. What is 10% was attainable? 7.2 years.
I’m confident you get the pattern – the higher the rate of return, the less time is needed for your funds to double. Compounding is truly one of the many miracles in life!
So there you have it – the Rule of 72. It is helpful when thinking of your own portfolio and evaluating the viability of investment options. And it also makes a fun party trick!
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