I’m sure many people have heard of the ‘Rule of 72′ which posits that if you divide 72 by your annual investment return, you will get the number of years required to double your money. Some oft quoted examples:
You are earning 7.2% on your investments. 72 divided by 7.2 = 10, therefore it will take 10 years to double your investment.
You are earning 10% on your investments. 72 divided by 10 = 7.2, therefore it will take 7.2 years to double your investment.
If you remember your basic math, it should work the other way in that if you want to double your money in 5 years, you just need to divide 5 into 72 to figure out your required rate of return, which in this case is 14.4%.
However, just as Newtonian physics falls apart at extreme values, so to does the Rule of 72. Best example: Your portfolio returned 72% last year. If you divide 72 by 72, apparently it will take your investment 1 year to double. However, 72% does not make a portfolio double. You would need 100% for that.
Here is a table that shows the time required to turn $1,000 to $2,000 according to the rule for various rates of return, and I’ve also included the actual portfolio value that would be realized.
1% for 72 years = $2,047.09
2% for 36 years = $2,039.89
7% for 10 years = $1,967.15
9% for 8 years = $1,992.56
12% for 6 years = $1,973.82
18% for 4 years = $1,938.78
24% for 3 years = $1,906.62
36% for 2 years = $1,849.60
72% for 1 year = $1,720.00
Heck, I’ve even charted it for your viewing pleasure. (I’m feeling extremely geekdified today I suppose)
So, when Newtonian physics fell apart at extreme values, Einstein’s Special Theory of Relativity came in to save the day by explaining how time dilates, length contracts blah blah blah at speeds approaching that of light (or something). If we have any twins who are willing to separate and have one invest their portfolio in a spaceship travelling away from earth while the other invests their portfolio here on earth we might be able to figure this out… :)