Does the idea of doubling your money sound like a get-rich-quick scam? Well, maybe it’s not quick, but there is a method that will show you how long it should take you to double your money with your investment return. It’s called the rule of 72, and it can be applied to any type of investment.
To use the rule of 72, divide the number 72 by an investment’s expected annual return. The result should be roughly the number of years it will take to double your money. For example, if the expected annual return of a fixed income investment is about 2.35% and you have $1,000 to invest, you would divide 72 by 2.35 to get 30.64 — the number of years it would take to double your $1,000 at that rate of return.
Of course, the catch is how to know the expected annual investment return. It’s impossible to actually know in advance what will happen to prices, and we know that past performance does not guarantee future returns. But by examining historical data, we can make an educated guess at what they might be. According to the 2018 Ibbotson Stocks, Bonds, Bills, and Inflation Classic Yearbook, the average annualized return of large-company stocks from 1926 to 2017 was 12.1%. At 12%, you could double your initial investment in large-cap stocks every six years (72 divided by 12 = 6).
Keep in mind that we’re talking about annualized returns, or long-term averages. In any given year, stocks will probably not return 12%. They might return 25% or lose 30%. You never know. It was over a long period of time that returns averaged out to 12%.
The rule of 72 doesn’t mean that you’ll definitely be able to take your money out of the stock market in six years. You might have actually doubled your money by then, but the market could be down and you might have to leave your money in for several more years until things turn around. If you must achieve a certain goal and be able to withdraw your money by a certain time, you’ll have to plan carefully, choose your investments wisely and keep an eye on your portfolio.
