People invest in stocks, bonds, and real estate for only one reason: to have more in the future than they do now. Seems simple, but it’s not, that’s why I wrote Does it Pencil over 30 years ago. Today I’m going to share a simple piece of advice everyone should know about when it comes to money and investing. It’s called, “The Rule of 72”.
Back in the Day
Back in the day (in the 1400’s), the Italians we really kicking butt when it came to math and science. In 1494 along came a friar named Luca Pacioli who figured out what we know today as the Rule of 72. He put it this way:
“In wanting to know of any capital, at a given yearly percentage, in how many years it will double adding the interest to the capital, keep as a rule [the number] 72 in mind, which you will always divide by the interest, and what results, in that many years it will be doubled. Example: When the interest is 6 percent per year, I say that one divides 72 by 6; 12 results, and in 12 years the capital will be doubled.”
Translation: The Rule of 72 tells you how long it takes for something to double itself or be cut in half.
Example 1
Let’s say you invest $100 with compound interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $200 (about).
Example 2
To determine how long it takes your “buying power” to be cut in half, divide the rule-quantity by the inflation rate. At 7% inflation using the rule of 72, it should take approximately 72/7 = 10.29 years for a unit of currency to lose half its value.
Example 3
What about those pesky mutual fund fees and expenses? Same dealyo. Divide 72 by the fee. For example, if your fund charges a 3% fee, the total account value will be cut to 1/2 in in 24 years (72/3 = 24) when compared to holding the same investment with no fees.
So there ya go. The Rule of 72. Thanks Luca Pacioli.
Good luck and have a good week.
Joe Still
2023.08.06
Cite
“Rule number 1: Never lose money. Rule No.2: Never forget rule No.1.”
– Warren Buffett