How long it takes you to double your original investment is a pretty standard way for investors to determine the effectiveness of their portfolio. The goal as an investor should be to double your holdings in the safest and quickest way possible. Having the tools to help you determine if a stock is going to net you the return you are after without using a calculator can save you a lot of time while you do your research.
Determining how compounded interests affect your investments can be difficult if you try and work it out long form, but there is a rule that many experts use to help them quickly calculate this at a glance. This rule is called “Rule of 72”.
Definition:
“Rule of 72 is a rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.”
The basic math looks like this. Lets say your current rate of return is 6%. Take 72 and divide it by 6 which gives you 12. This means at 6% it will take you 12 years to double your money.
Lets look at some real world examples so you can see why it makes sense to take control of your investments and earning the best possible return.
Checking account Rate: .01% 72 ÷ .01 = 7200 years (Ouch)
Savings account Rate: 1.05% 72 ÷ 1.05 = 68.57 years (Super Saver Account)
Registered Savings Bonds: 4% 72 ÷ 4 = 18 years (Best Bond Rate Possible. Right Now they are .5%)
Balance Mutual Fund: 5% 72 ÷ 5 = 14.4 years (Decent Return for a Mutual Fund but not really possible over a 14.4 year span.)
Grown Mutual Fund: 8% 72 ÷ 10 = 9 years (High Risk Mutual Funds almost never return this high a rate over a 9 year span.)
Investing in the Dow Jones: 9.5% 72 ÷ 9.5 = 7.57 years (9.5% in the historical average market gain)
Investing in Solid Companies Paying Dividends: 14.4% 72 ÷ 14.4 = 5 years (First Portfolio I ever created without many of my rules in place)
Investing in Solid Companies Paying Dividends#2: 32.8% 72 ÷ 32..8 = 2.2 years (Second Portfolio using current rules)
Looking at the numbers above you will see why I will never allow anyone else to invest my money. Yes keeping some money in liquid form does make sense but not from a growth perspective. If you are looking to grow your portfolio using bonds, mutual funds or high interest savings accounts, you can quickly how long it would take. Looking at these numbers you can see that by simply investing in the market you will net a higher return than the banks offer. Taking this one step further and by investing in solid performing companies you can see how easily you can out perform that average.
Looking at my first dividend portfolio at 14.4% you can see that it isn’t difficult to out perform the market. I really only had a basic understanding of the stock market at this time and I still earned a much better return than my bank. I have since moved most of my mutual fund money out of my bank portfolios and moved them into a new portfolio. I will post the results after the first year is complete.
Keep in mind the market average includes all the top performers but also includes companies that have gone bankrupt or who are generally run poor. These companies drag the percentage down so you can see how it wouldn’t be difficult to out perform the market by a significant amount.
