The OTHER Rule of 72 and A Reminder of The Original One

The rule of 72, the established one, is a great tool for calculating the future value of your investments. It is an illustration of the magic of compound interest. As a reminder we will summarise this classic rule of 72 below.

In the context of market volatility and directional uncertainty, there’s another rule of 72, that is particularly relevant this year.

What is this other rule of 72?

We are exposed to a surfeit of data- information, news feeds, analyses, interpretations, and prognostications on what is going on in the world, in financial markets, and what it means for our financial plans and therefore our investments.

The very real danger is that one can react to the latest information and make changes, only to see that data point change, or even reverse in the coming days.

The other rule of 72 is to wait 72 hours, 3 days, before acting on new market impacting news.  This provides time for considered analysis and application, it allows for a change or reversal of that data point, and in doing so can avoid costly mistakes.

This feeds into a piece of investment management theory that is debated amongst academics, the efficient market hypothesis. This posits that all information is know by the market and priced into the market in real time and at all times. The application is that if you find some news, you cannot take advantage of it to get ahead of the market, because the markets already know and have priced it in. This relates to short term changes.

It may be that an investor will make a fundamental change to a portfolio based on new data with a forward view of weeks or months. This other rule of 72 is just as applicable here. More trades are placed on self-managed portfolios in times of increased market volatility. Anecdotally, it appears most of these are momentum driven, with investors selling because of negative news, and in doing so capturing a loss. The investors that take their time to assess the information and then respond more strategically, tend to perform better.

We discussed this concept of maintaining composure and remaining focused on objectives, and not the latest daily news, in our article on our work of the year- Ataraxia – at the end of last year. You can read about it here.  

It is easy in theory to abide by this principle, and in practice we know it is much more difficult, and completely normal to be worried when markets fall, or the news is bad. That is why we are here, to guide you through these times and keep your financial plan relevant and working for you. If you are concerned, whether you are a client or not, contact us and we will be happy to speak with you.

The other reassurance, if you need some is to look at the rule of 72 and what it can mean for your future.

The original Rule of 72

If you have savings goals and you want to have an estimate of how long it will take to grow your wealth, the rule of 72 can show you.

The “rule of 72” is a simple way that you can work out how quickly your savings might double in value, based on the expected rate of return.

It is also a useful tool in long term planning to see how long it takes for inflation to halve your spending power.

Applying the rule of 72 to your investments, to track the growth, the formula is:

Number of years to double your money  = 72 ÷ rate of interest/return

So, if your money is in a fixed-interest account paying a guaranteed 2% each year, it would take 36 years for your cash to double in value.

36 years = 72 ÷ 2%

If you had your money in an investment earning 6% per annum, it would only be 12 years: 12 years = 72 ÷ 6%.

This is an approximation but can be useful as a quick and easy way to get an idea of how your wealth will grow.

The chart below shows how long it could take to double your money, or for inflation to halve your spending power, based on different rates of return.

The chart is for illustrative purposes only. The “rule of 72” is only an approximation. Figures take no account of additional savings that an investor might make, or the impact of inflation.

These are only approximations, and investment returns can rarely be guaranteed. It does show, however, that being too cautious with your money could hinder your progress towards your long-term goals, and that high inflation can erode the value of your savings.

Sensible, objectives focused and appropriately diversified investing can help you towards your long-term targets. When it comes to planning to meet long-term goals, the return you achieve on your wealth can help to determine whether you’ll have “enough” to reach them.

If you are concerned about short term market movements, zooming out and looking at the long term potential of your investments can be the perspective and motivation needed to stay the course.

Get in touch

If you’d like help in building a saving and investing portfolio that’s right for you, please get in touch. Email us at info@blackswancapital.eu and we will be happy to speak with you.

Please note

This article is for information only. Please do not act based on anything you might read in this article.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.