The Rule of 72: and his lesser know sidekick, The Rule of 115.
by Steve Gail
The Rule of 72. I lot of you may have heard of it and how it is utilized to help you figure out how much money you will have down that long winding road of investment return. The Rule of 72 basically says that if you divide 72 by the rate of return that your current investments receive, you will then know how many years it takes for your investment to double. Once again, if you divide 72 by the rate of return that your current investment receive, you will know how long it takes for your investment to double.
Let's take a look at several examples, so that you are clear on exactly how it works, and for those DRIP investors that already have this down, we will use it as a short review. Let's say that your current DRIP plan was averaging 8% a year. The formula would look like this:
So you can see that 72 divided by 8.00% investment yield will take nine (9) years to double. To get a visual feel, examine the chart below.
EXHIBIT A: Examples of Various Rates of Return and number of years before your investment will double.
Stated simply, that is the Rule of 72.
Seems simple enough, it's a quick formula to really see how much of a difference your rate of return impacts your long-term DRIP investment. (Just take a look at 1% versus 24%, that is 72 years to double versus 3 years, What an impacting difference!)
However, there is another rule, with just a much impact that most investors and even brokers are not very aware of. This Rule is the Rule of 115. It has always been a mystery to me, why this Rule has been hidden so well in the background, when it provides just as compelling insight to the long-range investor as the Rule of 72. The Rule of 115 simply states if you take 115 and divide it by the rate of return, you will then know how long it takes your investment to Triple. You are probably asking yourself the same question. Why the Mystery? Your guess is as good as mine is. But now that you have both of these Rules you have a pretty good idea as to the total impact of TOTAL RETURN. Let's take our same example and see what the Rule of 115 tells us.
Let's say that your current DRIP plan was averaging 8% a year like in our prior example. The Rule of 115 would look like this:
So you can see that 115 divided by 8.00% investment yield will take fourteen and thirty-eight hundredth's (14.38) years to triple. For the visual effect, examine the chart below.
EXHIBIT B: Examples of Various Rates of Return and number of years before your investment will triple
So now you have to quick use tools to let you see your much of an impact your rate of return makes on your long term DRIP program.
Now having both the Rule of 72 and the Rule of 115 by your side, you have the ability at a glance to anticipate what your investment dollars will be worth using simple what -if scenarios.
Hope this helps.
Until Next Time,