A BEGINNER'S FINANCIAL GUIDE FOR A RICH LIFE

THE INFAMOUS RULE OF 72 ON INVESTING

How to Double Your Money in 7 to 10 Years

Every investment guru will tell you that if you simply park your money and leave it untouched in a portfolio containing a mix of any non-speculative, dividend earning, and stable investments, it will eventually double its value after a specific period of time. This is not magic or an empty promise. This is a mathematical probability that uses the power of compounding interests.

Ask any investment banker or financial adviser you know and they will tell you it is true. They have had this knowledge for a long time, yet for some reason they seem to be hiding it from us. This infamous mathematical probability is called the Rule of 72.

investment photoThe Rule of 72 is basically a mathematical shortcut meant to determine the future value of a certain amount. Specifically, it calculates the length of time it will take an investment to double in value if it is left to grow with compounding interest. According to the rule, if you divide the number 72 by the annual rate of return, it will give you the length of time for your money to double with the given rate.

Mathematically, the Rule of 72 is expressed as follows:

Annual Rate multiplied by Number of Years (for it to double) = 72

If the annual rate is given, you can get the Number of Years (for it to double) with this:

Number of Years (for it to double) = 72 divided by the given Annual Rate

If you want to know at the rate you will double your money for a given number of years you can use this:

Annual Rate = 72 divided by desired Number of Years

 Following the formula above, you will arrive at 7.2 years for your money to double its value at 10% compounded annual rate of return (72/10%). Similarly, you can calculate that it will take 10 years for your money to double at 7.2% (72/7.2).

Clearly, the ball is really on your side of the court. As indicated by the calculations above, it is highly possible for you to double your money within 7 to 10 years – but for that to happen, you need to invest your money in a portfolio mix that gives an annual collective yield of between 7.2% and 10% c.

Using this as your basis therefore, what you need to do is to carefully put together a mix of investment instruments which have demonstrated their consistency in providing similar yields in the past. The bottom line is – it still is your call.

Your choices of where to put your money will actually depend a lot on what kind of an investor you are – as well as on your appetite for taking risks.

If you are the conservative kind with no appetite for risk taking, then your portfolio must only include investments that are considered relatively safe and stable. This can be a diversified mixture of blue chip stocks and investment grade bonds.

Blue chip stocks are those issued by financially stable and well-established companies with billions of dollars in capitalization. These companies are not likely to go under in the near term. They are also known for paying increasing dividends through the years (some even for decades).

On the other hand, investment grade bonds are municipal or corporate bonds with high (AAA to AA) to medium (A to BBB) credit rating and are therefore thought to be least likely to default.

Let’s assume that you have a portfolio mix made up evenly of blue chips stocks and investment grade bonds. If the blue-chip stocks in your portfolio have an average annual yield of 10% and your investment grade bonds have an annual return of roughly 6%, then these two should collectively give you a net return of 8%. Using the Rule of 72 formula, you divide 72 by the net return (8%) to get 9 years – the length of time to keep your money invested in this mix for it to double its value – and 18 years to quadruple it.

The speculative investors may, however, find the waiting time of 7 to 10 years too long and too boring. They are the types of investors who are willing to face bigger risks for bigger pay-offs. They are fully aware of the fact that in investing, the bigger the risks you take, the bigger the rewards will be.

Because they are in a hurry to supersize the value of their investments, they prefer to put their money on the more volatile stock options, delve on highly leveraged trading, or get engrossed with picking penny stocks. These are the types of investment where you can double your money overnight or lose your shirt just as fast.

Some words of caution though. If it’s a nest egg you want to build for the future which you are looking forward to helping you go through your golden years comfortably, then it’s best to avoid being speculative. Set your sights instead on placements that will provide you with reasonable and stable annual returns with less risk.

And in case somebody comes along trying to convince you to join their speculative bandwagon by showing you his almost spotless trading records, put one thing in your mind – “A sterling performance in the past is not a guarantee of future results.”  Resist the temptation to turbo-charge your investments and stay conservative. Your money is bound to eventually double in time anyway so why take the extra risks?

Below is a Rule of 72 chart showing the type of returns that will double your money over a corresponding period of time. This may help you in your search for the best placements for your money that will double it in time.

 

   

% Annual Investment Yield

 

Number of Years to Double your Money

 

72

3

x

24

=

72

4

x

18

=

72

5

x

14.4

=

72

6

x

12

=

72

7

x

10.2

=

72

8

x

9

=

72

9

x

8

=

72

10

x

7.2

=

72

11

x

6.5

=

72

12

x

6

=

72

13

x

5.5

=

72

14

x

5.1

=

72

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