The rule of 72
Several years ago, I heard of “the rule of 72″. If you haven’t heard about it, you are probably not a great investor.
Basically, it is a method for estimating the time it takes for an investment to double. For example,
if your investment appreciate 6% a year, it takes approximately 12 years to double in value. If it returns 9% a year, it doubles in about 8 years. You may see the relationship here…
Annual return * number of years = 72
Of course, it is just an approximation. However, it is simple enough to remember. Why is it important?
Well… if you want to be rich, you better keep this formula in mind when you are making any financial decisions. For example, if you have $10,000 to invest and you keep it in saving account and assume it yields 2 percent a year. And 36 years later, you find that it is worth $20,000 only.
On the other hand, if you put it in stock, mutual fund or ETF, over long time, it is possible that it yields 10-12% a year. According to the rule of 72, it doubles every 6 or 7 years. And 36 years later, you find that your investment becomes $320,000. It makes a huge difference.
Yeah… your may lose money in short term if you invest in stock, mutual or ETF. You may think that it is risky. However, if you investment horizon is long enough, these investment tends to give you positive return.
