Could you explain the “Rule of 72?”
The “Rule of 72” is used by investors to compute the amount of time it will take for an investment to double in value. If you take the rate of return you want and divide it into the number 72, the result will be the number of years it takes for the investment to double. For example, if you assume an investment will have an 8% rate of return (compounded annually), divide 72 by 8. Since 72 divided by 8 equals nine, it will take approximately nine years for that investment to double.
If you divide the number of years it takes for an investment to double into 72, you will get the compounded annual rate of return. For example, if you could double an investment in five years, and you divide five into 72, the result is about 14 plus percent (compounded annually). This is the “Rule of 72.” Many people are fascinated by this rule. It works in the same way that 3.14 (pi) works in computing the area or circumference of a circle.
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