MODULE ON INVESTMENT SELECTION Article 3 THE RULE OF 72

This article short presents a mathematical curiosity that is very useful to calculate how long it takes for an investment to double in value given a certain rate of return. The only thing needed is to remember the number 72. Let's see.

 

If we expect a yield of 8% it will take nine years to double our money, just because 8 multiplied by 9 equals 72. That is, if we invest 100 now at an 8% return we will have 200 after 9 years. Similarly, if the return was 12%, six years would be needed to double our money, since 12 times 6 also make 72.

This simple rule assumes that the money invested is not touched until the end. That is, both the initial capital and the returns it produces are reinvested year after year until the original investment
is doubled.

The rule also works if we fix the number of years and want to know the corresponding return. For instance, what should be the return to double my money in 10 years? The answer is 7.2% (because 7.2 times 10 equal 72).

Interestingly, the rule does not have to be limited to money. For example: In how many years will the population of a country will double if population growth is 2% per year? It will take 36 years (2 multiplied by 36 make 72).

It is important to note that this is a rule of thumb that loses accuracy when yields rise above 16%. However it is still very practical when we want to do fast computations without resorting to a calculator.

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