The Rule of 72 — is an excellent method to determine the time a financial instrument takes to double your money — however, there is a Caveat!
I am sure that most of you have heard about the Rule of 72. Let me give a brief example for those who have not yet heard about it. The Rule of 72 is nothing, but one can compute the number of years (or any time) it takes to double your investments. For example,
If you start investing, say, $10K in an index fund that delivers a return of about 7% (CAGR), then:
Number of years to double $10K = 72 / 7% = ~10 Years.
If a mutual fund or an ETF, or a stock delivers 15% (CAGR), then:
Number of years to double $10K = 72 / 15% = ~ 5 Years.
In a nutshell, the higher the returns faster you can double your money.
Returns at 7% need ten years to make $10K to $20K;
Returns at 15% need just five years to make $10K to $20K.
So simple right?
Then why is everyone complicating things in the world of Investing?
That’s because many do not have the patience to wait for ten years or more. We try to find ways to cut short the waiting period, and many try explosive derivative strategies to double the money — maybe in a year and some, aim it in a week. And this is why most people lose their hard-earned $.
Many traders have asked me about cryptos or NFTs in hopes not just to double but quadruple their money. All they think about is that ONE HOME RUN to hit the jackpot (a.k.a Gambling) and not consistency in their hits.
See the below snapshot of conversations where younger generations try doubling their money in 72 hours 🙂
Thus, the Rule of 72 is so simple to adhere to. Many fail to double their money mainly because they try to cut short to compound and break!
More than the time, it is important to choose instruments that can deliver consistent returns. For example, One can consider S&P 500 for their core portfolio and a Bond (65/30 ratio) and consider another 5% for cryptos or other explosive high risky instruments to play with. In this way, people can take a conservatively riskier approach.
To Summarize: Time and Patience helps to double your money if you choose a financial instrument that delivers consistent returns with the least volatility, like the S&P 500. The Rule of 72 is an excellent method to estimate the duration a financial instrument takes to double your money.
A simple chart showing tentative time to double your money when invested across various traditional financial instruments:
Ideally, one has to strike a balance between high and low-risk instruments and not focus on instruments that can double the money quickest solely!
Hope you liked this write-up!
Stay Safe & Trade Safe!