The Number That's Changed How I Look at My Investments

On Our Minds…

I've become obsessed with the number 72. An odd number to be fixated on, I know. It's not a lucky number for me, I don't know any 72-year-olds, nor is it how many days I have left until vacation.

Instead, it's all thanks to what's known as The Rule of 72. The concept is likely old news to many long-time investors, but I only recently read about it and am now fascinated with the idea. Which is why I'm writing about it. Everyone should know!

The Rule of 72 is, very simply, a math hack that lets us estimate how long it will take for an investment to double in value. There's an intricate mathematical calculation behind the rule that gives the precise result, but this shortcut provides an estimate that comes very close in every case. (Far more advanced math experts have written about it many times; I trust their calculations!)

Here's how it works. You take the number 72 and divide it by the annual return you expect to generate on your investment and voila — the result is how long (in years) you can expect until you have twice as much money as you started with.

So, let's say I've invested $20,000 and I expect to earn an annual return of 4 per cent. According to the Rule of 72, it would take 18 years to double my investment to $40,000. (That's 72 ÷ 4 = 18) Hmm…I of course instantly ask myself what kind of annual return it would take to double my investment in fewer years, say eight. Same type of calculation. Divide 72 by the number of years you'd like to see your investment double by to get the return rate you'll need. In this case, 72 ÷ 8 = 9. So I'd need a return of 9 per cent to double my investment in eight years.

I've run all kinds of variations using the Rule to figure out when I can retire. Again, I have to keep reminding myself that The Rule of 72 isn't an exact determination, but more of a rule of thumb or approximation. In fact, one of the best ways I've seen it described is a "back-of-the-envelope" calculation.

But it's a pretty interesting "back-of-the-envelope" calculation that drives home the amazing benefits of the snowball effects of compounding interest. And yes, that's another concept I'm obsessed with…but that one goes back a few more years!

On Our Minds is a regular feature written by members of RBC Direct Investing's Inspired Investor content team.