Rule of 72

I find the Rule of 72 useful when comparing expected returns between stocks and other investments.  The Rule of 72 says that in order to find out how many years it takes your money to double in a particular investment, choose a rate of return and divide it into 72. 

For example, if the long-run average annual return of stocks is 11%, the Rule of 72 means that, on average, stock returns double every 6.54 years (72 divided by 11).  If the long-run average return on bonds is 5% per year, then bonds double every 14.4 years (72 divided by 5). 

Let’s see what happens to a $10,000 investment, over 26 years, earning 11% per year.  That $10,000 will double nearly four times (26 divided by 6.54).  Thus, $10,000 becomes $20,000 becomes $40,000 becomes $80,000 becomes approximately $151,000.

Now, let’s look at bonds.  Since bonds return, on average, 5% per year, the value of the bond doubles nearly twice in 28 years.  That means $10,000 becomes $36,000 at the end of 26 years. 

Which would your rather own-stocks or bonds?  Of course, looking at the current economic conditions – don’t answer that yet, but the moral of this story:  Your money grows best by investing heavily in stocks!