What Is: The Rule of 72
- What Is: Passive Investing
- What Is: Dollar Cost Averaging?
- What Is: Bottom-Up Investing
- What Is: Top-Down Investing
- What Is: Value Investing
- What Is: Growth Investing
- What Is: Income Investing
- What Is: GARP Investing
- What Is: The Rule of 72
- What Is: A Falling Knife
- What Is: Cyclical Stocks
- What Is: The Dividend Yield
- What Is: The Price-to-Earnings Ratio (P/E)
- What Is: The Cash Flow Statement
- What Is: A Share Split
- What Is: A Share Buyback
- What Is: Discounted Cash Flow
- What is: An Exchange-Traded Fund (ETF)?
- What is: A Hedge Fund?
- What is: The Balance Sheet?
- What Is: The Profit and Loss Statement?
- What is: A Limit Order?
- What is: A Two-Bagger
The Rule of 72 is a quick and easy way for investors to work out how many years it would take an investment to double in value.
All you have to do is divide 72 by the expected rate of return and, as quick as flash, you will arrive at an approximation of the answer. It’s a great way to impress friends and family at dinner parties.
Let’s say an investment is expected to return 10% a year. So 72 / 10 = 7.2.
In other words, it would take roughly seven years for the investment to double.
Just to prove that it works:
(1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1 x 1.1) = 1.1^7 = 1.949
So $1 invested at 10% a year would compound to $1.95 in seven years. That’s pretty close to a double.
It also works if you need to estimate how long it would take for a sum of money to halve in value too.
Let’s now assume that the rate of inflation is 5%. And you want to find out how long it would take for your savings to lose half its purchasing power. So 72 / 5 = 14.1.
In other words, a pot of money would only have half of its buying power after 14 years if inflation at a rate of 5% persisted over that period.
Some of the more eagle-eyed amongst you will probably point out that the Rule of 72 doesn’t work well for high rates of returns. And you would be right.
For instance, according to the Rule of 72, an investment that promises a 100% return would only take 0.72 years (or 8-1/2 months) to double, when it should take one year.
Therefore, it is important to appreciate that the Rule of 72 works best for lower rates of returns. For higher rates you are going to have to whip out your calculator or load up your spreadsheet. There’s a good chance that someone, somewhere, has written an app for that.