Today I wish to share with you on the 72 Rule in
Investing. It is a simplified version of compounding formula, and I think it is
quite interesting for you if you are interested in mathematics.
Compounding is a very important factor to decide how much you could earn at
the end of the investment journey. In long run, The multiple effect is much
higher than the addition effect. For example, let me show you a table as
below:
1,000 | +1000 | *1% | *5% | *10% | *15% |
2,000 | 1,010 | 1,050 | 1,100 | 1,150 | |
3,000 | 1,020 | 1,103 | 1,210 | 1,323 | |
4,000 | 1,030 | 1,158 | 1,331 | 1,521 | |
5,000 | 1,041 | 1,216 | 1,464 | 1,749 | |
6,000 | 1,051 | 1,276 | 1,611 | 2,011 | |
7,000 | 1,062 | 1,340 | 1,772 | 2,313 | |
8,000 | 1,072 | 1,407 | 1,949 | 2,660 | |
9,000 | 1,083 | 1,477 | 2,144 | 3,059 | |
10 years later | 10,000 | 1,094 | 1,551 | 2,358 | 3,518 |
11,000 | 1,105 | 1,629 | 2,594 | 4,046 | |
12,000 | 1,116 | 1,710 | 2,853 | 4,652 | |
13,000 | 1,127 | 1,796 | 3,138 | 5,350 | |
14,000 | 1,138 | 1,886 | 3,452 | 6,153 | |
15,000 | 1,149 | 1,980 | 3,797 | 7,076 | |
16,000 | 1,161 | 2,079 | 4,177 | 8,137 | |
17,000 | 1,173 | 2,183 | 4,595 | 9,358 | |
18,000 | 1,184 | 2,292 | 5,054 | 10,761 | |
19,000 | 1,196 | 2,407 | 5,560 | 12,375 | |
20 years later | 20,000 | 1,208 | 2,527 | 6,116 | 14,232 |
21,000 | 1,220 | 2,653 | 6,727 | 16,367 | |
22,000 | 1,232 | 2,786 | 7,400 | 18,822 | |
23,000 | 1,245 | 2,925 | 8,140 | 21,645 | |
24,000 | 1,257 | 3,072 | 8,954 | 24,891 | |
25,000 | 1,270 | 3,225 | 9,850 | 28,625 | |
26,000 | 1,282 | 3,386 | 10,835 | 32,919 | |
27,000 | 1,295 | 3,556 | 11,918 | 37,857 | |
28,000 | 1,308 | 3,733 | 13,110 | 43,535 | |
29,000 | 1,321 | 3,920 | 14,421 | 50,066 | |
30 years later | 30,000 | 1,335 | 4,116 | 15,863 | 57,575 |
As you can see from the table above, the longer the period we invest in and
the higher the compounding rate that we can achieve, the better the return we
could get. In long term investment, the most important thing that we have to
achieve is the Self Discipline as well as the Risk Management. The more
experience we are in the investing, the better result we could achieve in long
run.
Ok, so what's 72 Rule here?
It means that the number of years that we double up our investment are roughly derived from 72 divided by the compounding rate. For example, if your
annual return rate is 1%, it would take about 72 years to double up the
principal amount. However, if your annual return rate is 10%, it would only take
about 7 years to double up the principal amount. If we choose to select an
investment vehicle, Equity is always a good tool in achieving higher return
rate compared to Fixed Deposits / Fixed Income instruments.
Please note that, however above is just the theory of 72 Rule. It always
depends on ourselves in achieving the target annual return rate. Let us work
hard together to have a good investing execution plan.
Thank you and good luck in your investment journey.
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