Scientifically speaking, a single hocus pocus cannot double your money, but the rule of 72 can. Accordingly, this rule can possibly double your wealth in seven years while excluding a great amount of risks.
This rule works based on the assumption that you, the investor, reinvest your dividends and capital gains. The wonders of compound interests, in addition, make the rule feasible to work.
According to the rule of 72, any investor has the possibility to double their investment every 7.2 years. For example, think that you follow this rule once every decade. You will most likely be able to double what you already have every decade.
Citing the Balance, “the rule states that the amount of time required to double your money can be estimated by dividing 72 by your rate of return.” Put simply, it goes like this:
- Investing at a 10% return will double the money every 7.2 years (72/10 = 7.2)
- Investing at a 9% return will double the money every 8 years (72/9 = 8)
- Investing at an 8% return will double the money every 9 years (72/8 = 9)
- Investing at a 7% return will double the money every 10.2 years (72/7 = 10.2)
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Consideration Upon Doing Rule of 72
Considering that the rule works by assuming that you reinvest your dividends and capital gains, this also insinuates that you never withdraw your investment during the period. In other words, you can categorize this as a long term investment.
However, it is also worth noting that markets do not always flow at an average growth. During a hard time like coronavirus pandemic, it is hardly possible for markets to stably grow.
That said, the rule of 72 suggests that, in order to gain long-time average, you have to stay on track. For that reason, you should not your emotion guides you to buy more when the stocks are climbing or to sell more when it goes the opposite.