27 June 2013

72 Rule in Investing


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.

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...

View All My Posts Here